New Home Sales Meet Expectations in September

New home sales, measured at the offer, not at the closing, came in at a 701,000 seasonally adjusted, annualized pace in September, which is slightly below the revised August figure but in line with forecasts. On an annual comparison, new home sales were up 15.5%, driven by sales in all regions except for the Midwest. Manufacturing counties, most of which are concentrated in the Midwest, have been hardest hit by the trade war and, more recently, the GM strike; those losses are spilling into the housing market.

After two months of steady growth, the largest part of the housing market, existing home sales, contracted to a seasonally adjusted, annualized rate of 5.4 million in September, a 2.2% drop from August. Compared to September of last year, however, home sales were up almost 4%, the strongest yearly growth since March 2017. Annual growth on a regional basis was broad-based, save in the Midwest, where sales have been flat. Existing home sales make up about 90% of the housing market, including single-family homes, townhouses, condos and co-ops.

Prices have been steadily increasing for both existing and new homes, led by tight supply, especially at the entry level. However, the premium buyers have to pay for a new over an existing home has finally narrowed; it ballooned in the wake of the crisis.

Mortgage applications for new home purchases peaked in August and have been steadily declining since. In the spring, new purchase application volumes hit a peak, which contributed to the home sales growth in the summer; there is about a two-month lag from application to home purchase, but not all applications turn into purchases. With the August bump, we expect to see an uptick in home sales in October, but that will taper off into the rest of the fourth quarter.

Bottom Line
The housing market got a second wind over the third quarter, but tight inventories and high prices put a cap on gains. Housing activity is expected to contribute to overall GDP for the first time in more than a year and a half in the third quarter, but only modestly. Realtors are clamoring for new construction but are likely to remain disappointed, given the elevated costs of construction and the loss of builders since the crisis.

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