The Census Bureau issues a monthly report tracking newly constructed homes with a committed sale during the month. These statistics are estimated from sample surveys and are subject to revision due to the survey methodology and definitions used. The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. New home sales are a good indicator of consumer confidence and of future spending for durable goods such as appliances, furnishings and home electronics.
New home sales jumped 7.9 percent in August to an annual rate of 421,000. This follows a sizable dip in July and reflects lower prices as more new homes are coming into the market. Overall, the median price of new homes fell 0.7 percent to $254,600 which is the fourth monthly decline in a row. The year-on-year rate for the median price is up only 0.6 percent and is down from high single digit to low double digit gains earlier in the year. Inventory stood at 175,000 homes at the end of August, representing a supply of 5 months at the current sales rate. This is still up from earlier in the year and could suggest that the housing market is beginning to lose steam.
A more detailed look at the data shows that the fastest growing market continues to be the Midwest, but the August data showed increases sales throughout the country – except in the Western states.
One of the important facets of the new home sales report is that it reflects overall confidence in the long term health of the national and regional economy. The transaction costs of purchasing a new home are high, and it generally takes from 5 to 7 years to recoup them. In other words, renting a home is generally less expensive than owning unless one plans to stay in the house for at least 5 years. As such, increases in home ownership, and in new home construction represent a long-term bet on one’s ability to continue to make payments in the long term. The current boomlet in home sales likely reflects the fact that the economy has been in an upward trajectory (albeit from a lower base) over 4 years. This combined with low interest rates and other incentives to purchase homes has helped strengthen the housing market. Whether or not this will continue as interest rates begin to increase remains to be seen, but the long term trend is that housing and home prices tend to grow along with inflation and population.