New home sales jumped to a 694,000 unit rate in March, the strongest pace since November. Gains were concentrated in the West where inventory shortages have been most acute. We also saw a moderate gain in the South, the largest market for new construction. The level of sales in the South remained below the highs hit last November. The supply of new homes on the market dropped to 4.4 months; that’s the lowest level in a year and near an historic low.
The median price for a new home rose to $337,200, up nearly 5% from this time last year. Homes sold in the $300,000-$499,999 range posted the largest gains. The premium for new construction remains extremely high. Buyers are paying more than 30% for new construction compared to existing homes. Despite rising demand from first-time buyers, supply is limited. Escalating land, materials and labor costs are making it harder for builders to move downstream to build more speculative projects as they usually do late in the cycle. Higher prices at the gas pump are likely to become another hurdle for builders. Increased commuting costs keep home buyers looking in suburbs near urban areas, where land costs remain elevated. The concern, especially in light of rising mortgage rates, is that affordability is being eroded.
Another hurdle on the cost side is the high number of existing homeowners who are opting to make repairs and remodel instead of trading up. Many homeowners deferred maintenance on their homes following the crisis because they either couldn't afford it or were reluctant to invest in what was then a depreciating asset.
The recovery in housing remains muted, held back by a lack of inventory to meet demand. The result is higher prices. We are still optimistic that housing will eke out a gain in 2018; next year is starting to look worrisome. It is important to note that housing is usually the first sector to stumble before the economy falls into recession.
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