Home Sales Rise Despite Inventory Concerns

March marked the second consecutive month in which sales of new and existing homes increased. Sales of new single-family houses rose by 4% to reach 694,000 units (at an annualized rate). This follows an increase of similar magnitude in February, when they were 3.6% higher than in January.

Existing home sales also increased in March, albeit by a more modest 1.1%, following a more robust 3% jump in February. Existing home sales were at an annualized rate of 5.6 million units, just a shade higher than the average rate of the preceding 12 months.

There are currently 1.67 million existing homes for sale, lower than last year’s average that exceeded 1.8 million houses. If no additional houses were to come into the market, this inventory would be depleted in 3.5 months, typically quoted in the press as “3.5 months’ supply.” As a consequence of the low inventory, house prices are rising fast.

The Case-Shiller Home Price Index, which is a true price index because it tracks the price of the same house over time, was 6.3% higher in February compared to a year ago. This is, of course, good news for people who own or are selling a house, because their home equity has gone up. But higher prices prevent some people from home ownership because affordability is now out of their grasp.

The chart above shows that prices have seen a steady rise since June 2016. The 6.3% price increase year-over-year for the 12 months ended in February is more than a half-percent higher than what it was a year earlier, in February 2017. Moreover, house prices are rising at a rate 1% higher than two years ago.

The average price of an existing home was $282,000 in February — nearly $12,000 more than a year ago.

More High-End Homes Sold

A high-end home is classified as a new single-family house that sells for at least $500,000. A total of 29,000 new homes were sold for $500,000 or more in the first quarter of this year — which is 2,000 more high-end houses than were sold in the first quarter of 2017.

As illustrated in the chart below, the number of high-end houses has been increasing steadily for the last few years. Also, for most years, high-end home sales capture a greater percentage of total new houses sold. This year, one of every six houses sold was considered “high-end.”

Good News on Homeownership

Last week also brought the good news of an increase in the homeownership rate, that rose by 0.6% to reach 64.2%. This means that today, there are 1.42 million more homeowners than a year ago; at the same time, the number of renters has fallen by 250,000 households.

The increase in the number of homeowners is good news for the kitchen and bath industry because they are likely to engage in remodeling and improving their houses in the near future. Those remodeling expenditures would not take place if they had remained as renters.

The chart shows that homeownership is finally breaking out from the level it had from 2014 to 2016 – a level that was virtually the same as in the late 1980s, three decades ago.

These new homeowners represent a business opportunity for our members, whether the person purchased a new or an existing home. As we have pointed out in the past, research from the Joint Center of Housing Studies (Harvard University) has shown that consumers who move to a new residence spend more money on improvements than those who stay in their current residence, and this is true whether remodeling a newly purchased existing home or customizing a new build.

Mortgage Rates Jumped Last Week

Last week, mortgage rates had their highest increase since January, when the average mortgage rate also rose by a similar magnitude of 11 basis points. The latest surge brings the 30-year fixed rate to 4.58%, which is its highest level in nearly five years.

This is not great news for potential homeowners. We are now operating under a new regime where interest rates will begin to constrain both the construction market as well as the sale of existing homes. Besides the rise in home prices cited above, higher interest rates will put added pressures on households’ ability to purchase a home.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $750,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers, for instance.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.