New Home Sales Constrained Supply

New home sales slipped to a 662,000 unit rate in April, after being revised down to a 672,000 rate in March. Sales remain up a little more than 7% from a year ago, but are not enough to meet burgeoning demand, even in the face of rising rates. The shortfall in monthly sales came in the West, where supplies of both new and existing single-family sales remain the tightest. Overall inventories remained historically low, but were revised up slightly since the start of the year. A shortage of land, given a sharp increase in regulations at the state and local level since the onset of the crisis, is the largest complaint among builders. California has made some efforts to ease the permitting process, but those efforts are still small when compared with the problem.

Many state and local government have voted in constraints on builders on the premise of controlling their carbon footprint. My contacts who worry most about climate change and the economy, however, argue that the regulations in place actually worsen the carbon footprint of housing by forcing lower income households further away from their place of work. This is also a hurdle to mobility and low wage workers gaining access to some of the hottest job markets. When housing regulations inhibit the pace of development the big winners are existing homeowners, who see the price of their properties appreciate.

Median prices fell between March and April, but the average price jumped to $407,300 on the heels of an uptick for the month in homes built in the $750,000 and over range. There has been a major shift in the composition of construction since about 2013 from homes in the $100,000-$299,000 to more expensive homes. New homes for $200,000 and under have almost disappeared from the market, despite the extraordinary demand for more affordable housing. In general, builders have been unable to move into the entry-level market due to the high cost of land.

The housing market is suffering from a structural shortfall, particularly for more affordable and entry-level homes. That shortfall is not improving and likely to persist, despite the rise in interest rates and lower demand for new homes that will eventually emerge from that. We are chronically undersupplied in the market.

Today’s data ended up adding to overall GDP growth. The biggest effect was in brokerage commissions, which rose because a few more very expensive homes (over $750,000) were sold. There is a legitimate concern than the reduction in the size of mortgages that can be deducted will take a toll on those very high end sales going forward. The deductions on mortgage interest expense were lowered from the first $1.1 million of a mortgage before the tax cuts to $750,000 after.

Bottom Line
Hurdles to new construction are not easing as rapidly as they normally would. Shortages of land, materials and labor are all issues. Construction wages have actually accelerated but there simply are not the skilled carpenters that there once were in the market: they have left, retired, or not entered the country in the ranks that they once did. The result is showing up in prices. That will not change until the situation becomes untenable. I am getting concerned about 2019. Housing tends to be the first out of the expansion as rates rise.

About the author
Diane Swonk Diane Swonk
Chief economist
Twitter: @DianeSwonk

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