On initial glance, new home sales appear to have weathered the storm much better than existing home sales. November new home sales saw year-over year gains of 9.1 percent and up 4.3 percent sequentially from October 2015 (which was revised downwards from an initial 495,000 sales to 470,000). In comparison, November existing home sales dropped 3.8 percent year-over-year on a seasonally adjusted annualized rate and were down 10.5 percent sequentially from October. But there really is no comparison. While existing home sales are counted when the property closes and transfers title, new home sales are counted at the time the purchase contract is signed. In some circumstances, the building permit has not even been issued and that transaction, if closed may not consummate for up to two years.
Existing home sales were thought to have hit a temporary slowdown due to the new TRID rules impacting closings of loans with applications commencing October 3, 2015. The complexities and uncertainty in interpretation of the new Federal regulations issued by the CFPB either delayed or terminated many loans and corresponding closings in process.
Since new home sales are merely signed contracts, they thus far have experienced none of the impact of TRID seen in existing home closings. As time progresses and the TRID process and associated regulations are clarified and fully incorporated, new home sales may not see the regulatory related dip seen in existing homes.
The following graph shows new home sales and median prices monthly since 2007 – the peak of the market. Sales are expressed on a seasonally adjusted annualized rate (SAAR) and stated in thousands. The median new home price in November at $305,000 tied the all-time record set in October 2014.
A driver of record new home prices is the change in mix in the type of new construction taking place. Diminished today is new entry level home construction, with more upscale building taking place. Part of this is driven by rising developed lot prices. A major residual of the housing bust has been an ongoing shortage of new residential building lots, and with planning, zoning and permitting requirements in many markets restricting new near-term delivery of new supply.
The following graph shows median new and existing home prices monthly since January 2001. From 2001 through 2008, the average price premium for new construction versus an existing home was 12.0 percent. Since 2011, that premium has jumped to an average 35.5 percent. While increased construction costs can account for a small portion of this differential, I believe it has been the departure from entry-level home construction and a transition to move-up and luxury housing driven by high-lot and land costs and demographic factors.
No doubt another major contributor to the slowdown in new entry level housing sales has been the reluctance or inability of Millennials to participate in homeownership. Demographics are disrupting what long was considered normal trends. As noted in several of my Tweets this week and earlier (follow me on Twitter at DrTCJ), Millennials are delaying many of the stages that lead to long-term decisions such as homeownership:
- Sam Zell, renowned real estate investor and guru stated at the CCIM Thrive Conference that the “deferral of marriage is the most significant demographic change taking place today” — DrTCJ Tweet 10-28-15
- 43% of the respondents to the America at Home Survey said they planned to buy a home when they got married or moved in with their life partner –DrTCJ Tweet 12-26-15
- Median age for the first marriage among females has risen from 25.1 years of age in 2000 to 27.0 years in 2014 delaying home buying – US Census Bureau — DrTCJ Tweet 12-26-15
- Median age for the first marriage for males has risen from 26.8 years old in 2000 to 29.3 years old in 2014 – US Census Bureau — DrTCJ Tweet 12-26-15
- Residential land prices are up 95 percent since 2009 and are within 15 percent of the 2006 peak (which were bubble prices) – Zelman & Associates — DrTCJ Tweet 12-12-15
- More than one-half of all Millennials (51.8 percent) have less than $1,000 in total savings and just 18 percent from $1,000 to $5,000 — howmuch.net — DrTCJ Tweet 12-11-15
- The prime age for buying a home is 31, but he largest age groups are 23, 22 and 24, portending several years of home buying – US Census — DrTCJ Tweet 11-16-15
- Millennials, the largest demographic cohort in U.S. history, make up 1 in 3 of all homebuyers today and 68 percent of 1st time homebuyers – NAR — DrTCJ Tweet 11-16-15
If you missed these gems of information, consider following me on Twitter by clicking https://twitter.com/drtcj
All said, new home sales continue to track along. Supply is not keeping up with demand and demographics are at play. Still, with 52 percent of renters today paying more than 30 percent of their income on rent, expect some good news in coming months and years regarding new and existing home sales.
Ted