New Home Sales Expanded in January

New homes sold in January hit a seasonally adjusted annual rate of 764,000, while December sales were revised up. Sales rose by almost 8% from December and nearly 19% from January one year ago. On a regional basis, the West, Midwest and Northeast posted close to 50% annual gains in sales, which can be explained by mild winter weather added to strong demand. The South, the largest housing market, saw small monthly and annual declines but the trend in sales is still rising.

Recent developments in the spread of the novel coronavirus, named COVID-19, spooked financial markets and global investors, driving down the return on the 10-year Treasury bond to the lowest rate historically. Mortgage rates are currently sitting at 3.49% but we expect that number to drop by the end of February as mortgage rates are highly responsive to the 10-year yield. Because mortgage rates ticked up slightly before the COVID-19 news, refinance applications contracted during the week ended February 21. Mortgage applications to purchase a home, however, rose almost 6% that same week. As rates drop in response to COVID-19 shocks, the silver lining will be mortgage refinancing. Mortgage applications to purchase a home could contract if potential buyers get scared as the threat of COVID-19 becoming a full-blown pandemic could be realized.

Existing home sales, a lagging indicator but also the largest component of the housing market, slipped in January to a seasonally adjusted annual rate of 5.46 million. While that is off slightly from December, sales are still hot compared to one year ago with almost 10% growth. Inventory available for sale, while up slightly from December’s record low, sat at just over a three months’ supply in January. The housing market needs about six to seven months’ supply in order to properly match supply with demand. Supply of new homes available for sale sat at just over five months’ supply, better than existing home supply; that can be attributed to the higher median price point of new homes ($348,200) to existing homes ($266,300). Homes in the entry-level end of the market are at a two to three months’ supply while higher-priced homes have about seven to eight months’ supply.

Bottom Line
If only there were about one million more homes on the market, we could be experiencing the hottest housing boom in decades. Record-low inventory for both new and existing homes is placing limits on the market, while builders cannot find enough workers to build fast enough. Buyers in some of the hottest housing markets in the country expect to offer an average of $100,000 over the asking price, just to be considered in the first round of bids.

That said, COVID-19 is an extraordinary event, and events of this type create hesitation, especially when it comes to making a large commitment like purchasing a home. That could undermine gains this spring.

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