New Home Sales Weaken

New home sales fell nearly 8% to a 607,000-unit pace in January after rising in December. The losses came despite higher builder optimism about the prospects for the housing market at the start of the year, a modest drop in prices and lower mortgage rates. New home sales are recorded upon the offer, not the closing, of the sale as in the existing market, which makes it a more contemporaneous indicator for housing than existing homes sales.

Losses were expected in all regions except the West, which has suffered some of the most acute housing shortages. California is facing some of the biggest hurdles to affordability and has begun to reform land use laws. This is enabling builders in some parts of the state to move downscale and build more entry-level homes, but the numbers remain low relative to demand.

The largest gains in sales were in the $200,000 to $399,000 price range. That captures more entry-level buyers. The downside is more recent data on mortgage applications in early March; it reveals that wealthy trade-up buyers are returning to the market now that rates have fallen. Entry-level buyers are still having a tough time with affordability, especially in the hottest urban job markets. The supply of entry-level homes on the market remains unusually low.

Bottom Line
We are expecting to see a bit of a rebound in the housing market over the next few months. Those gains will fail to open the market to first-time buyers, largely millennials. It is critical to remember that this generation was the hardest hit on earnings in the wake of the Great Recession. They report wanting to buy homes as much as other generations. Their economic circumstances and escalating costs (including tariffs) in the construction market have forced many of them to shelve those dreams for now. The result means that they will also suffer on the wealth front; most households cite their homes as the largest asset.

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