Home Sales Continue to Slide

New home sales followed the trend for existing home sales and disappointed in September. Sales dipped to a 553,000-unit pace, off more than 5% from August and down more than 13% from a year ago. Median home prices moved up a bit from August to $320,000 but that is down from one year ago. Some builders have been attempting to build more modest homes for first-time buyers but find the margins too thin below the $300,000 price. Everything from land to labor and materials costs has been rising. Tariffs on materials have proven particularly costly.

Add in rising interest rates and, all of a sudden, builders have more homes than they can sell. The inventory of new homes for sale moved up significantly in September. We saw a similar uptick in inventories for existing homes. That data also revealed that it is now taking longer to sell a home. (Similar data is not available for new home sales.) Anecdotal reports suggest that builders are having a hard time moving homes priced at over one million dollars. Older home buyers who have equity in their homes are also opting to remodel instead of trying to trade up.

The drop in new home sales last month was greatest in the Northeast and West where complaints about affordability have been the loudest. We have seen a drop in foreign buyers who had played a key role in pushing up prices in some of the hottest urban markets.

Realtors are still hoping that a pickup in income growth will allow first-time buyers more flexibility even as rates rise. A jump in the number of homes for sale and some easing of price increases may help open the market to more first-time buyers. The concern, however, is that the housing market has hit a peak for this cycle, which is a much lower peak in overall volume than we saw during the subprime lending bubble.

Housing tends to be the first sector to respond to higher interest rates, which raises a red flag on the longevity of this cycle. The silver lining is that, after reaching a peak, housing can plateau for more than a year and a half before the overall economy slips into recession.

Bottom Line
The housing market is showing signs of cresting. The recent weakness in new home sales is a concern given the coincidental nature of new home sales and demand, which indicate overall market reaction to higher rates. We are still hoping for another leg up for the housing market in 2019 as rising incomes reopen the market for buyers. The risk, however, is that we don’t see as much of a rebound as the forecast shows.

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