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3 Things to Keep in Mind as New Home Sales Near 7-Year High

by Peter Thomas Ricci

New home sales up quite a bit so far in 2015, but many market forces remain at work

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The good news continued for new construction in May, with new home sales rising 2.2 percent from April and 19.5 percent from May 2014 to a seasonally adjusted annual rate of 546,000, according to the latest report from the U.S. Census Bureau.

Those numbers come after a 26.1 percent yearly increase in April, and thus far in 2015, new home sales have risen 24 percent over the same period in 2014 and are near a seven-year high.

As Chicago Agent reported last month, though, there remain several qualifiers to those rosy statistics, and they remain just as relevant in the Census Bureau’s latest report.

1. The Expense of New Homes – The sale prices for new homes have risen rapidly in recent years, but interestingly, May’s sale prices were relatively modest. At $282,800, the median sales price was down 2.9 percent from April and 1 percent from May 2014, while the average sales price of $337,000 was up 0.92 percent monthly and 4.17 percent year.

Again, that’s a change of pace from previous months, when the prices of new homes rose aggressively. However, prices are still above where they were 10 years ago, when housing was in the midst of the bubble – since May 2005, the median sales price is up 23.9 percent, and the average sales price is up 17.3 percent.

2. Inequality in New Home Sales – New construction in recent years has trended towards bigger, more expensive listings, as builders have maximized their profits and geared their products for safer, deeper-pocketed consumers. That trend has not only led to the aforementioned increases in home prices, but also a complete reversal in the breakdown of new home sales across price brackets.

For instance, according to Census Bureau data, new home sales priced $199,999 and below made up  40.83 percent of the market in May 2005, but 10 years later in May 2015, that share had fallen to 25.49 percent. Meanwhile, new home sales priced $200,000 to $399,999 now make up 52.94 percent of the market (up from 40 percent), and new homes priced $400,000 and above now make up 21.57 percent (up from 20 percent).

A year-to-date breakdown of price brackets is even more striking. Thus far in 2015, new home sales priced $199,999 and below are up 11.3 percent. New home sales priced $200,000 to $399,999, though, are up 25 percent, and those priced $400,000 and above are up 33 percent.

So yes, overall new home sales are up 24 percent year-to-date, but a closer statistical analysis shows that new construction, like the rest of housing, has grown in an unequal fashion.

3. New Home Sales Remain Historically Low – Finally, even with 2015’s double-digit increases, new home sales are still below their historical levels, and in two ways. First, as Zero Hedge demonstrated, excluding the boom/bust cycle of the bubble years, May’s annual rate of 546,000 puts new home sales at the same level as 1992. And second, the existing-to-new ratio – how many existing-home sales there are to new home sales – is still high at 9.8:1, meaning there are nearly 10 existing-home sales to every new home sale. In a normal housing market, the ratio is 6:1.

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