Sales of new homes came in at a seasonally adjusted annual rate of 694,000 units in December, missing economists’ expectations. The drop marks the third month in a row of declines, including a downward revision for November, but is more reflective of tight inventories than waning demand. Looking more broadly, new home sales jumped 23% in December 2019 compared to the same time in 2018. Low mortgage rates have reopened the door to first-time buyers, many of them millennials, who were unable to buy earlier in the cycle. Unusually warm winter weather in the Midwest was also a plus; this region posted the strongest gains for the month. Because of the way new home sales are booked (on offer, not sale), this makes them more of a coincident indicator of economic conditions and weather distortions.
Existing home sales, which are recorded at closing, came in at a seasonally adjusted annual rate of 5.54 million in December, a 10.8% increase from December 2018. Regional sales growth was broad-based on an annualized basis. The South and the West posted double-digit sales growth, while the Midwest and Northeast reported gains of 9%. That translated into sales price growth in all regions, bringing the national median sales price to $274,500, up nearly 8% from a year ago.
The supply of housing available for sale remains constrained, with the unsold existing home inventory sitting at a three-month supply. Analysis by realtor.com estimates that the housing market is short nearly four million homes. That would take builders about five years to replenish if they don’t ramp up more aggressively. A sharp consolidation in the home builder market has limited the number of builders who are currently in business, while labor shortages remain acute, especially for highly skilled carpenters and other specialty contractors including plumbers.
Wall Street investors flipping homes for rentals in the wake of the housing bust is another constraint on inventory, especially for entry-level homes. In December, sales of homes under $100,000 fell almost 8%, while all other price categories went up.
Mortgage applications to purchase a home surged in the first two weeks of the year, which will boost buyer activity now, borrowing sales from the traditional spring selling season. The risks are two-fold: 1) Tight inventories are pushing up prices, which could lock out first-time buyers from the market again as we move into late Spring, and 2) A major correction in financial markets associated with the coronavirus could temporarily sideline potential buyers.
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