The headline for this morning is that new home sales are down more than 14 percent on a month-to-month basis. This comes in tandem with drops in mortgage applications and a much smaller drop, of less than 1 percent, in existing home sales. With rates up, and demand potentially declining as institutional buyers pull back, is it time to worry that the housing recovery is over?
Short answer: no. The current slowdown—which is just that, not a decline—is normal for this stage of the cycle. In fact, it’s healthy.
We’ll get into details in a minute, but here’s the big picture: What we’re seeing now in the market is due to weather, supply constraints, and, yes, higher rates. Slower growth is not a decline, though, and as growth continues, all of those factors should become less important.
Let’s start with supply and demand. The ratio of homes sold to homes available for sale, or demand to supply, is shown below, along with price changes.
As you’d expect, the chart indicates that house prices follow supply and demand. The recent decline in the sold/for sale ratio predicts slower price growth—around 3 percent to 5 percent, if you look at the scale on the left. This is still above inflation, so prices should continue to increase in real terms—hardly a crash. In fact, it’s a good thing. As we learned in 2008–2009, long-term double-digit price increases lead to a bubble, something we don’t need to revisit.
Let’s take a more detailed look at the sold/for sale stats. Focusing on new homes for sale, we see that the months of total supply has ticked up over the past couple of months—largely due to weather, I believe—while remaining at levels consistent with the mid-2000s. Meanwhile, the time needed to sell a new home, once completed, remains at 15-year lows, per the following chart.
What’s the common factor here? Limited supply of new construction, which remains below the lowest levels of 1984–2009. With low supply, completed units sell quickly, even though weather-related reduction in demand slowed some of those sales over the past quarter.
Looking at existing home sales, we don’t see the same supply constraints, but we can consider the level of home sales adjusted for the number of households in the country. Households need a home, and long-term averages should provide a guide to a reasonable level of sales per household, which can help to determine whether sales levels are sustainable or not.
If we review that data, per the chart below, we again see that demand is actually running well below the levels of the past 15 years in terms of home sales per household. This says a couple of things to me:
- First, current demand, which has led to rising prices, is sustainable and may well grow.
- Second, current demand is well below the levels following the 2000-era dot-com crash, which indicates that demand can grow even if the recovery slows.
Overall, a slowdown in the housing market (as predicted by the first chart) is normal, but the underlying dynamics suggest continued but slower growth, which is healthy. As we start to process these reports over the next month or so, picture yourself schlepping around in a snowstorm looking at a house, and you’ll understand the source of much of the recent weakness. Spring should lead to more sustainable growth after a difficult start to the year.