Category Archives: Economy

CR: A few comments on New Home Sales

A few comments on New Home Sales

by Bill McBride on 5/23/2013 

Obviously the new home sales report this morning was solid with sales above expectations and significant upward revisions to prior months. I try not to react too much to the month to month ups and downs; the key points right now are that sales are increasing and will probably continue to increase for some time.

Now that we have four months of data for 2013, one way to look at the growth rate is to use the “not seasonally adjusted” (NSA) year-to-date data.

According to the Census Bureau, there were 153 thousand new homes sold in 2013 through April, up about 26.4% from the 121 thousand sold during the same period in 2012. That is a very solid increase in sales, and this was the highest sales for these months since 2008.

Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 369 thousand in 2012.

Although there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years – substantially higher than the current sales rate.

And an important point worth repeating: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future’s so bright, I gotta wear shades.

And here is another update to the “distressing gap” graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I’m looking for the gap to start to close over the next few years.

Distressing GapClick on graph for larger image.

The “distressing gap” graph shows existing home sales (left axis) and new home sales (right axis) through April 2013. This graph starts in 1994, but the relationship has been fairly steady back to the ’60s.

Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren’t able to compete with the low prices of all the foreclosed properties.

I don’t expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close – mostly from an increase in new home sales.

Distressing GapAnother way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early ’70s, but I only have annual data for the earlier years).

In general the ratio has been trending down, and I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Read more at http://www.calculatedriskblog.com/2013/05/a-few-comments-on-new-home-sales.html#ajG83ZzszQ2EqyVZ.99

Leave a comment

Filed under Economy, Home Sales

DeptofNumbers: Growth in Mortgage Purchasing Power

Growth in Mortgage Purchasing Power

POSTED WEDNESDAY, APRIL 03 2013

Above is a chart of real median household income and the real purchasing power of the same median household income when utilizing a 30-year mortgage. Said another way, if you kept the fraction of real median household income going towards a mortgage payment the same (say 30%), the red line shows the growth in what you could buy with your payment.

The chart highlights the dramatic rise in purchasing power of the median income household despitethe lack of growth of the median household’s real income. Growth in the capacity to borrow has replaced income growth over the last 30 years. Of course this is possible because interest rates have been falling continuously since the early 1980s making it feasible to borrow more and more with less income.

If we wanted to increase purchasing power in an environment where interest rates were not in decline, we’d need to see a substantial increase in real median income. For instance, say 30-year mortgage rates were at 6.5% instead of their recent level of roughly 3.5%. All else being equal, to get the same purchasing power as a 3.5% mortgage rate with a mortgage rate of 6.5% would require a 41% increase in real income! 1 Clearly (and by design in recent years), record low mortgage rates are a huge stimulus for home prices.

What happens when the 30+ year secular decline in interest rates ends? Even if rates stay low, the stimulus of declining rates on asset prices (homes in particular) will disappear. While incomes will likely increase over the next few years, we’ve already seen how much they would need to increase to match the purchasing power effects of falling interest rates. And if interest rates rise even modestly, purchasing power will be significantly curtailed. How home prices, under the additional influences of inertia and psychology, actually respond is another matter.

1. Assuming again that a borrower would want to spend the same fraction of their income on a mortgage payment regardless of the interest rate environment. 

Leave a comment

Filed under Economy, Home Sales