Home Builders Chase First-Time Buyers

New home sales, purchases of new homes recorded at the offer and not the closing, came in at a seasonally adjusted annual rate of 733,000 in October, a 32% increase from a very weak October last year. All regions saw strong yearly gains in sales. The last two months posted the strongest level of new home sales activity in 12 years but that remains a shadow of the peak we saw at the height of the bubble in 2005.

Inventories of new homes for sale on the market held at nearly six months’ supply, which is above the lows hit earlier this year but still tight. New home prices actually dropped 3.5% from a year ago to a median price of $316,700. The bulk of sales were concentrated in the $200,000 to $399,000 price range. Builders are finally pushing to capture first-time buyers, whose demand is strongest. The largest pickup in home ownership rates was in the 35-44 year-old category, as the oldest millennials are opting to buy instead of rent.

Existing home sales, which are more of a lagging indicator of housing demand as sales are not booked until closing, came in at a 5.46 million annual rate in October. That is up 4.6% from a year ago. Strong activity in the South and Midwest helped boost sales, while the West and Northeast suffered small losses compared to last month.

Low mortgage rates help boost housing demand over the summer and early fall. Pending home sales remain strong. Rates have risen again in recent weeks which could put a crimp in sales in early 2020. Inventories are another hurdle, as older home owners are aging in place. That loss in turnover, combined with a large number of tear-downs in the wake of the crisis, has depleted the supply of existing homes for sale.

The resulting shortfall in inventories is showing up as an acceleration in existing home prices. The median price of an existing home came in at $270,900 in October, a 6.2% increase on a yearly basis and the strongest increase in more than two years.

Bottom Line
The housing market continues to show momentum as we head into the end of the year, providing a boost to residential investment. A pickup in new home construction is particularly welcome given the burgeoning demand for entry-level housing. It may not be enough, however, to offset the upward pressure on existing prices and the dampening effect that higher mortgage rates could have on the market as we move into 2020.

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