New home sales came in at a seasonally adjusted annual rate of 646,000 in June. The figures represent a 7% monthly and 4.5% yearly gain for this important housing measure, which is recorded at the offer, not the closing. The surprising driver of June gains came from the West, with figures up 50% from the previous month. The country’s largest market for new homes, the South, remained flat, while the Northeast and Midwest lost ground. Only the Western region posted gains.
High prices and short inventories continue to hamper what is typically the busiest season for the housing market. The median sales price for new homes slipped to $310,400 in June. Prices have remained above the $300,000 threshold for the last 29 months. Total inventories are at a 6.3 months’ supply, but entry-level inventories are significantly lower.
Existing home sales declined more than expected in June with a pace of 5.27 million units, a monthly drop of 1.7% and a yearly drop of 2.2%. The share of first-time buyers moved up to 35% of sales though inventory remains tight with just four months’ supply. Much of the current inventory is old and dilapidated. Post-recession, homeowners reduced their investment in their homes; conditions of older homes have been in decline ever since. While entry-level home prices are still affordable, buyers must consider the additional costs of renovation as a factor in their purchase decisions.
The median price for an existing home climbed to $285,000, a record high. Prices continue to climb across all regions, with the West recording median prices above $400,000, and the Northeast above $300,000. The South and Midwest, while still showing median prices below $250,000, are inching upward too. The South continues to dominate the housing market, with existing sales at 43% and new home sales at 59%, thereby keeping national median prices below the $300,000 threshold, for now.
The 30-year mortgage rate hit new lows earlier this month, is currently at 3.81% and could decline further if the Federal Open Market Committee (FOMC) cuts rates and alludes to additional rate cuts at next week’s meeting. Mortgage applications for refinancing increased 2.1% last week, an ongoing trend with the current low mortgage rate environment. Those increases were not enough to offset the overall slide in mortgage applications so far this month, driven by declines in applications by new home buyers. The silver lining is that the recent data from the National Association of Realtors (NAR) suggests the percentage of existing home sales to new home buyers is now at 35%, a 4 percentage point increase from June 2018.
Increasing construction costs, arising from the tight labor market and lumber tariffs are behind rising house prices. Nationwide, May’s estimated unfilled construction jobs came in at 369,000, a 90,000 increase from May of 2018. At the peak of the pre-2008 building boom, the builders estimate the number of construction job openings as a percentage of total employment plus current job openings was 2.7%. Since October 2016, this open position rate has been above that rate, with May’s rate at 4.2%.
Low mortgage rates and high employment are still not enough for some would-be home buyers to enter the market. When the Federal Reserve expressed concern over the housing market earlier this month, the mortgage market had already priced in an upcoming rate cut of 0.25%; those effects are already played out. High house prices continue to outweigh low mortgage rates as the key decision driver. With June’s housing permits at a two-year low, we don’t expect the housing market to regain its footing this summer.
Copyright © 2019 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.