New home sales were up an estimated 16.6 percent in November 2013 when compared to November 2012, at a seasonally adjusted annualized rate (SAAR) of 464,000. Median price rose 10.6 percent in the same period. The following chart shows new home sales monthly since 2001, on a SAAR basis.
On an initial look, you would have the impression that new home sales were doing well (which I believe is the case). Some analysts, however, pointed out that new home sales on a SAAR declined sequentially from October, dropping 2.1 percent. The only reason for the decline was that the October number was restated from an original 444,000 to 474,000—an increase of 6.8 percent. Without the restatement, sequentially, new home sales would have risen. Also, who is to say that the just reported November number likewise will not be restated in coming months?
This is one of the primary reasons I prefer to utilize a 12-month moving average of the monthly SAAR of home sales. While monthly data are continually restated, the actual trends remain relatively static. The following graph shows the effect of sales when reported on a 12-month moving average.
The next graph contrasts the raw unadjusted data monthly since 2011 to the 12-month moving average in the same period.
New home prices continue to climb, with the November 2013 median price of $270,900, up 10.6 percent from the same time a year ago. New home prices continue to command the largest premium when compared to existing homes, as illustrated in the following graph.
So why the record differential between new and existing median prices?
First, builders have several headwinds to deal with. The country is just now getting builder-ready lots available after the hiatus of land development from 2006 through 2011. And this is only in those markets that can relatively fast-track new development. In those markets with extensive and time-consuming approval processes, such as California, new lot availability is still years off. Another headwind has been lack of available skilled crews. Workers in the home building industry during the boom moved on to other types of jobs. Finally, the entire materials industry is having to gear back up to handle the increased demand. Hence supply has been restricted in an environment of growing demand resulting in price increases.
Second, as mortgage loan underwriting requirements have become more restrictive, fewer entry-level first-time homebuyers are able to qualify. As a result, in some markets, builders have abandoned the entry-level market of condos, townhouses and small homes, and are focusing on the higher-end move-up market. These are larger, higher amenity homes in more preferred neighborhoods, and thus carry greater price tags.
Third, as consumers and builders become more focused on sustainability, many of the new homes have features that, while cost more in the initial construction, save the consumers energy and water costs each and every month for the life of the building. From energy efficient air heating and cooling systems, roof decking with built-in radiant barriers to water usage minimization, construction costs rise, as does the sales price. At the same time, however, monthly utility costs decline.
So where do I see new home sales a year from today? If the market were to grow at the same pace seen in the past 12 months, next year would see sales of 560, 000 to 580,000 (based on a 12-month moving average). Is that doable? Without question—assuming no recession, continued job growth and interest rates not exceeding 6 percent for 30-year fixed rate loans. If job growth were to pop even more, the 600,000 sales mark is reachable.
New home construction continues to improve, but we remain several years away from the 800,000 to 1 million home sales normal.
Ted