Category Archives: real estate

U.S. New Homes Market Cap Peaks in July 2022, Drops in August 2022

U.S. new home sales unexpectedly rose in August 2022. Here's how Reuters covered the most important numbers in the story:

New home sales surged 28.8% to a seasonally adjusted annual rate of 685,000 units last month, the Commerce Department said on Tuesday. July's sales pace was revised higher to 532,000 units from the previously reported 511,000 units....

The median new house price in August was $436,800, an 8.04% increase from a year ago.

What Reuters didn't say is that August 2022's new home prices fell $29,500 (-6.3%) from its revised level of $466,300 in July 2022. That previous month's median new home sale price was itself revised 6.1% higher from the $439,400 it was initially reported to be a month earlier.

At the same time, mortgage rates dipped slightly from July to August 2022, falling from 5.41% to 5.22%. The unexpectedly high number of new home sales would appear to be the result of homebuyers recognizing that respite would likely be very short lived, who then scrambled to lock in the month's combination of lower mortgage rates and lower sale prices.

We'll take a closer look at what those changes mean for new home affordability next week, but for now, we'll look at what the combination of revisions and new information involving new home sales means for the U.S. new home market. Political Calculations' initial estimate of the trailing twelve month average market capitalization for new homes in the U.S. in August 2022 is $29.81 billion, down 5.1% from our initial estimate of $31.40 billion for July 2022.

Meanwhile, our revised estimate for July 2022 is $31.47 billion, a 0.2% increase from our initial estimate, confirming this month represents the peak for this measure in 2022. The large, upward revision in new home sale prices almost fully accounts for that outcome. The latest update of our chart shows U.S.' new home market cap's shifted trailing twelve month average.

Trailing Twelve Month Average New Home Sales Market Capitalization in the United States, January 1976 - August 2022

The next two charts show the latest changes in the trends for new home sales and prices:

Sales continued trending downward:

Trailing Twelve Month Average of the Annualized Number of New Homes Sold in the U.S., January 1976 - August 2022

Upward price trend is slowing:

Trailing Twelve Month Average of the Mean Sale Price of New Homes Sold in the U.S., January 1976 - August 2022

We've included the raw monthly data for new home sales and their average monthly sale prices in these latter two charts to illustrate the month-to-month noise in the data. The data for new home sales is typically finalized some three months after it is first reported.

Looking forward, we anticipate September 2022 will see both fewer sales and lesser affordability given the spike in mortgage rates during the month. The next data release for new home sales will come on 26 October 2022.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 27 September 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 27 September 2022. 

U.S. New Homes Market Cap Peaks in July 2022, Drops in August 2022

U.S. new home sales unexpectedly rose in August 2022. Here's how Reuters covered the most important numbers in the story:

New home sales surged 28.8% to a seasonally adjusted annual rate of 685,000 units last month, the Commerce Department said on Tuesday. July's sales pace was revised higher to 532,000 units from the previously reported 511,000 units....

The median new house price in August was $436,800, an 8.04% increase from a year ago.

What Reuters didn't say is that August 2022's new home prices fell $29,500 (-6.3%) from its revised level of $466,300 in July 2022. That previous month's median new home sale price was itself revised 6.1% higher from the $439,400 it was initially reported to be a month earlier.

At the same time, mortgage rates dipped slightly from July to August 2022, falling from 5.41% to 5.22%. The unexpectedly high number of new home sales would appear to be the result of homebuyers recognizing that respite would likely be very short lived, who then scrambled to lock in the month's combination of lower mortgage rates and lower sale prices.

We'll take a closer look at what those changes mean for new home affordability next week, but for now, we'll look at what the combination of revisions and new information involving new home sales means for the U.S. new home market. Political Calculations' initial estimate of the trailing twelve month average market capitalization for new homes in the U.S. in August 2022 is $29.81 billion, down 5.1% from our initial estimate of $31.40 billion for July 2022.

Meanwhile, our revised estimate for July 2022 is $31.47 billion, a 0.2% increase from our initial estimate, confirming this month represents the peak for this measure in 2022. The large, upward revision in new home sale prices almost fully accounts for that outcome. The latest update of our chart shows U.S.' new home market cap's shifted trailing twelve month average.

Trailing Twelve Month Average New Home Sales Market Capitalization in the United States, January 1976 - August 2022

The next two charts show the latest changes in the trends for new home sales and prices:

Sales continued trending downward:

Trailing Twelve Month Average of the Annualized Number of New Homes Sold in the U.S., January 1976 - August 2022

Upward price trend is slowing:

Trailing Twelve Month Average of the Mean Sale Price of New Homes Sold in the U.S., January 1976 - August 2022

We've included the raw monthly data for new home sales and their average monthly sale prices in these latter two charts to illustrate the month-to-month noise in the data. The data for new home sales is typically finalized some three months after it is first reported.

Looking forward, we anticipate September 2022 will see both fewer sales and lesser affordability given the spike in mortgage rates during the month. The next data release for new home sales will come on 26 October 2022.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 27 September 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 27 September 2022. 

New Home Affordability Falls in July 2022

What effect did the bottom falling out of the bottom of the new home market in July 2022 have on their relative affordability to the typical American household?

If you answered "new homes became less affordable", you're right! The mortgage payment for a new home sold to a median income earning household would consume 37.7% of their monthly income, just a touch below its recent peak.

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - July 2022

In terms of raw affordability, the percentage of median household income with respect to the median new home sale price in July 2022 was 17.5%, holding near its record low value.

Relative Affordability of New Homes in U.S. | Annual: 1967-2020 | Monthly: December 2000-July 2022

Meanwhile, in a sign that at least one major news organization isn't paying attention, NBC News says "this is the best time in years to buy a house". Really.

That's just embarassing. If you know anyone who works at NBC News, please send them links to the charts on this page, or send them to Calculated Risk, or send them to the Wall Street Journal. There's no lack of credible sources who will dispute their assertion.

To understand why, please consider that price cuts are only just starting as housing sales collapse as the Federal Reserve continues its plans to hike rates to fight President Biden's inflation. As time passes, that means there will be many more times in the months ahead that will be a better time to buy a home than at this moment, just shortly past a peak of unaffordability, as NBC News would seem to believe. Buyers willing to wait for a better time to buy to get a better deal on a home than they can today will be rewarded.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 23 August 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 23 August 2022. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 27 August 2022.

Price Surge Spikes New Home Market Cap as Sales Collapse

The market capitalization of new homes in the U.S. is the product of two factors: average new home sale prices and the number of sales. Multiply these two numbers together and you have a direct measure of the relative health of the U.S. homebuilding industry.

After recent reports of plunging sales and falling prices for new homes in the U.S., we were fully braced to see the nation's new homes market cap follow suit. But once we got our hands on the latest data, we were in for a surprise. New home sales fell, but the average price of a new home sold in the U.S. spiked much higher.

Political Calculations initial estimate of the market cap for new homes in the U.S. in July 2022 is $31.40 billion, down 0.25% from our initial estimate of $31.48 billion for June 2022. Our revised estimate for June 2022 is $31.22 billion, a 0.8% reduction from our initial estimate, but against which, July 2022's estimated market cap represents an increase. The latest update of our chart shows the developing trend for the U.S.' new home market cap's shifted trailing twelve month average, which shows the market cap of new homes in the U.S. has hit a new post-housing bubble high:

Trailing Twelve Month Average New Home Sales Market Capitalization in the United States, January 1976 - July 2022

The next two charts show the underlying shifted twelve month averages of sales and price data for the new home market cap:

New home sales continued falling:

Trailing Twelve Month Average of the Annualized Number of New Homes Sold in the U.S., January 1976 - July 2022

Average sale price spiked up to $536,800:

Trailing Twelve Month Average of the Mean Sale Price of New Homes Sold in the U.S., January 1976 - July 2022

In the latter two charts, we're also showing the raw monthly data for new home sales and their average monthly sale price. Reuters reports "new home sales tumbled 12.6% to a seasonally adjusted annual rate of 511,000 units last month, the lowest level since January 2016". The news service also reported the "median house price up 8.2% to $439,400 from year ago".

But in focusing on the median, Reuters missed what happened to the average. In July 2022, the average new home sale price was initially estimated to be $546,800. That's up by 19.6% from the previous month's revised estimate of $457,300 and is up +18.3% from a year ago. For reference, the average sale price of a new home in July 2022 is over 40% higher than their level at the bottom of the Coronavirus Pandemic Recession in April 2020.

This large difference between median and average indicates the bottom fell out of the bottom end of the new home market in July 2022 compared to the previous month. New home sales were dominated by high dollar value homes being bought in July 2022. That's why the initial estimate of the market cap for new homes in July 2022 rose to its highest level when compared with the revised data for recent months.

We think this current trend is not sustainable and the situation does not bode well for the U.S. economy in the second half of 2022. New home sales contribute anywhere from 3% to 5% of the nation's GDP, so a falling market cap for new homes will represent a headwind for the U.S. economy.

We'll look at the trend for the relative affordability of new homes in the U.S. during the first week of September 2022.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 23 August 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 23 August 2022. 

How Big Mortgage Rate Changes Affect New Home Sales

How do big changes in mortgage rates affect new home sales?

That question has become very relevant to the U.S. economy with the Federal Reserve scrambling to contain President Biden's inflation by hiking short term interest rates. Their actions have directly impacted 30-year conventional fixed mortgage rates, which have risen from December 2021's average of 3.1% to June 2022's 5.4% because of the Fed's rate hikes.

That's a big change in a relatively short period of time for mortgage rates. One that's bound to impact the sales of new homes. In our first chart, we've sought to quantify how much that impact might be by plotting the percentage change in year-over-year new home sales against the year-over-year change in mortgage rates using fifty years worth of monthly data.

Change in New Home Sales vs Change in 30-Year Conventional Fixed Mortgage Rates, June 1972 - June 2022

A simple linear regression shows that changes in mortgages rates have an inverse relationship with changes in new home sales. Rising mortgage rates tend to coincide with negative changes in the sales of new homes, while falling mortgage rates coincide with increases in new home sales.

That makes sense because mortgage rates have a direct impact on the cost that homeowners pay on their mortgages. Given the same sale price, higher rates means a higher cost of ownership.

But the correlation between changes in mortgage rates and new home sales isn't as strong as you might think. The correlation coefficient (R²) is 0.182, which is relatively weak. In looking at the chart, it occurred to us that there's quite a lot of noise in the data associated with relatively small mortgage rate changes, which is where most of the changes are concentrated.

What would happen if we simply omitted the data where the absolute year over year change in mortgage rates was less than 1.0%? The next chart shows the results of that analysis.

Change in New Home Sales vs Change in 30-Year Conventional Fixed Mortgage Rates, Omitting Small Changes in Mortgage Rates, June 1972 - June 2022

Here, the correlation shows a moderately strong relationship between these two factors. Interestingly, there's little change in the linear regression itself after omitting the data, which still shows that for a given year-over-year change in mortgage rates, new home sales will move in the opposite direction by 8.5-9.0%. For June 2022, the most recent month for which we have initial data for new home sales, the 2.6% increase in mortgage rates over the past year corresponds to a negative 20% change in new home sales, which is nearly in line with what the linear regression would predict.

There's still quite a lot of noise in the underlying data however, so for us, it's not yet worth developing into a forecasting tool. Moderately strong correlations are mainly good for putting you in the right ballpark, so while they're useful for answering questions like how big mortgage rate changes affect new home sales, they come with a wider than desirable margin of error for telling you the exact change to expect when they occur.