Category Archives: real estate

The Current Trend for U.S. Median New Home Sale Prices

Beginning in January 2014, the trajectory of median new home sale prices in the U.S. with respect to median household income began to follow a new trend, with typical new home sale prices increasing at an average pace of nearly $11 for every $1 increase in typical household incomes.

U.S. Median New Home Sale Prices vs Median Household Income, 1999-February 2015

The good news is that rate of increase is less than half that observed during the primary inflation phases of the first and second housing bubbles in the U.S. The bad news is that rate of increase with respect to household incomes is still 2.7-3.3 times greater than those recorded during periods of stable growth in the periods preceding the inflation phases of real estate bubbles.

As we noted in our previous installment, the current pace of growth is consistent with that observed in the latter portion of the inflation of the first housing bubble.

Now, it's important to note that this situation doesn't mean that a new crash in housing prices is imminent, or even likely. Now that real estate investors have established a shortage of affordably-priced homes in the U.S. market, U.S. homebuilders are now better able to exploit the situation by building more affordably-priced homes, which several have begun to do in recent months.

Note to America's builders: less-expensive homes are starting to move.

Purchases of new homes climbed 7.8 percent from the previous month to a seasonally adjusted 539,000 annualized pace in February, a seven-year high, according to the latest U.S. government report. Perhaps the best news for the housing industry as a whole came in the breakdown of sales, by price.

Americans signed contracts to purchase 17,000 new houses in the $200,000-to-$299,999 price range last month, the most since March 2008. That amounts to 39 percent of the 44,000 properties sold in February (unadjusted and not annualized). Another 8,000 homes—the most in nine months—sold in the range of $150,000 to $199,999.

The shifting sales mix of new homes toward lower priced homes is prompting an increase in sales volumes, which is a desirable outcome for the current market. Since November 2014, when the median new home sale price in the U.S. peaked at $302,700, the median sale prices of new homes has fallen in each month since, and in February 2015, stands at a preliminary value of $275,500. This figure will be revised several times over the next several months.

The wild card in this situation is the state of the U.S. economy, where a number of leading and real-time indicators suggest has entered a period of contraction, particularly in states that have boomed in recent years with greatly increased oil and natural gas production. If that contraction expands significantly beyond these states or if it increases in severity, home prices could be negatively impacted.

References

Sentier Research. Household Income Trends: February 2015. [PDF Document]. Accessed 5 April 2015. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 5 April 2015.

An Almost Perfect Correlation

Now that we've established both how to calculate Irving Fisher's consumption-based measure of the size of the nation's economy as it matters to ordinary Americans (the national dividend) and compared that result with the alternative production-based measure of the national income of Gross Domestic Product (GDP) developed by other economists, the next question we'll address is how well does the national dividend line up with the incomes earned by the ultimate end consumers?

We'll do that as simply as possible, in nominal terms, by determining the correlation of the average annual total expenditures per consumer unit, which is the near equivalent of a U.S. household, with median household income over the thirty year span for which we have data for both series. The chart below shows the result of that very simple linear regression analysis.

The Almost Perfect Correlation Between Average Annual Total Expenditures per Consumer Unit and 
Median Household Income, 1984-2013

What we find is an almost perfect correlation for the years from 1984 through 2013, where the relatively small deviations from the otherwise nearly 1:1 linear trend are easily explained by the following factors:

Otherwise, with such an almost perfect 1:1 correlation, we confirm that our consumption-based national dividend for the U.S. almost perfectly represents the national economy as experienced by its most typical and ultimate end consumer representative: the median U.S. household.

Data Sources

U.S. Bureau of Labor Statistics. Consumer Expenditure Survey. Total Average Annual Expenditures. 1984-2013. [Online Database]. Accessed 14 March 2015.

U.S. Census Bureau. Income, Poverty, and Health Insurance in the United States: 2013 (P60-249). Current Population Survey. Annual Social and Economic Supplement (ASEC). Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income. [Excel Spreadsheet]. 16 September 2014. Accessed 21 March 2015.

Previously on Political Calculations

Once upon a time, last Wednesday, we solved a problem that had stymied economists since 1906. And we made it look easy!

Eerie Parallels for Second U.S. Housing Bubble

From time to time, we like to recognize the existence of spurious correlations in the data we regularly track, just for the sake of sharing them on those days where we're preoccupied with other projects. Today, that spurious correlation comes, literally, in the form of an eerie parallel between the growth trend of median new home sale prices with respect to the growth of median household incomes just before the first U.S. housing bubble topped out, and the current trend in the second U.S. housing bubble since April 2014:

U.S. Median New Home Sale Prices vs Median Household Income, 1999-Present (through January 2015)

Yes, those blue lines are indeed perfectly parallel to one another. So what do you think? Is history repeating itself? Or does it just rhyme from time to time?

References

Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 4 March 2015. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 4 March 2015.

Record Unaffordability for New Homes in 2014

In terms of affordability, 2014 became the worst year on record for the median price of new homes sold in the United States.

The chart below, showing the relationship between the trailing twelve month average of median new home sale prices and the trailing twelve month average of median household incomes reveals how new homes in the U.S. reached a record level of unaffordability for the typical American household.

U.S. Median New Home Sale Prices vs Median Household Income, 1999-Present (Monthly Data from December 2000 - December 2014)

In this chart, we're measuring the affordability of U.S. median new home sale prices against the trend that existed between these prices and median household income in the pre-housing bubble years from 1987 through 1999.

With that base for reference, we see that the previous record was reached in May 2006, when the trailing year average of median new home sale prices peaked at $242,658 in July 2006, which is 34% higher than the projected value of $181,000 that corresponds the same median household income of $46,700 if the stable trend that existed from 1987 through 1999 had held.

By contrast, the preliminary figures for December 2014 indicate that the median price of new homes in the U.S. exceeded that ratio, setting a new record. In December 2014, the trailing year average of median new home prices was $282,300, which is 37% above the figure of $206,000 that corresponds to the projection of the 1987-1999 trend at the same median household income level of $53,600.

To help put those figures in context, the chart below shows the major trends in the relationship between median new home sale prices and the median household income from 1967 through the present.

U.S. Median New Home Sale Prices vs Median Household Income, 1967-Present (Monthly Data from December 2000 - December 2014)

To put it bluntly, new homes have never been more out of reach for the typical American household for the 47 years for which we have both median new home sale price data and median household income data, given the typical level of affordability that existed in the nation's real estate markets before the U.S.' first housing bubble began to inflate in 2001.

References

Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 27 January 2015. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 27 January 2015.


The State of the U.S. Housing Market

Today, President Barack Obama is expected to talk about the state of the nation's housing market recovery at a speech in metropolitan Phoenix, Arizona, one of the hardest hit regions for the real estate industry in the whole country. We thought we'd show you what that recovery really looks like in advance of the President's speech.

Our first chart shows the number of new houses being built in the United States in each month from January 1959 through October 2014:

Seasoanlly Adjusted Annual Rate for New Residential Construction, January 1959 through October 2014 (Chart Through December 2015) - Source: U.S. Census Bureau

In this chart, we see that years after the first U.S. housing bubble peaked in 2006, the new housing market in the U.S. has finally recovered to a level that is consistent with the volume of production that occurred during previous major recessions.

Meanwhile, the median sales price of new housing has skyrocketed since the first housing bubbble bottomed and stabilized, with the typical home now being sold in the U.S. now far out of the affordable reach of the typical American household:

U.S. Median New Home Sale Prices vs Median Household Income, December 2000 through November 2014

This was largely due to the onset of what we've described as the second U.S. housing bubble, where major investment firms bought up mass quantities of distressed properties, creating an artificial shortage that has continued into the present day. The primary inflation phase of that investor-driven activity took place between July 2012 and July 2013.

Since then, the rate of growth of median sale prices for new homes has slowed, but is still well above historic rates of growth consistent with a health new home market. Since January 2014, the median sale price of a new home in the U.S. has been rising at $9.77 for each $1 that median household income has increased, which is anywhere from 2-3 times the typical pace that was seen in the period from 1967 through 1999, or in the initial post-housing bubble crash recovery period from January 2011 through June 2012.

Our next chart below shows the longer term picture for the escalation of median new home sale prices in the U.S. since 1967.

U.S. Median New Home Sale Prices vs Median Household Income, 1967 through November 2014

One of the big reasons that new home prices have escalated during the second U.S. housing bubble is because U.S. home builders deliberately neglected producing affordable homes as investment firms bought up low priced homes in the existing real estate market, focusing instead on building larger percentages of premium homes that they attempt to sell for premium prices.

Share of New Homes Sold Each Month in U.S. by Sales Price, Trailing Twelve Month Moving Average, January 2003 - October 2014

As with the first U.S. housing bubble, we see that the sales mix of the current housing market has once again become considerably skewed toward the high end of the market. We see that new homes priced $300,000 or more now claim about 40% of all sales, up roughly 10% from the level recorded in July 2013.

That's quite a dramatic change in such a short period of time. In fact, this kind of change in the sales mix of new homes should be considered to be a characteristic of a bubble in the new home market. Speaking of which, we should also note that what determines if a housing bubble exists is the rate at which prices change with respect to household income - comparisons of the current price level or quantity of homes built with those recorded during previous peaks or troughs do not matter in that determination.

That's why the proposals to cut the cost of mortgage insurance in half and to relax mortgage lending standards to allow lower down payments that President Obama is expected to make in his speech in Arizona today are particularly out of touch - doing absolutely nothing to fix the problem of housing prices that are increasingly rising out of the affordable reach of the typical American household. Worse, they could potentially trick people who really can't afford the kinds of homes currently being sold in the U.S. to sign mortgages for homes they cannot afford, which proved to be a real problem, if not a big mistake, during the deflation phase of the first U.S. housing bubble.

Of course, this is the same President who gave a speech yesterday trumpeting the recovery of the U.S. automobile industry at an automobile production plant that has been shut down for the past week because of poor consumer demand for the kind of fuel efficient automobiles produced at it, so expecting the President to be in touch with economic reality might be expecting far too much.

It would seem then that the perspective of the U.S. economy that a President gets from spending so much time on the nation's golf courses probably isn't sufficient to keep in very good touch with the nation's economic realities. But at least he has something positive to show for all his time on the links, as media reports indicate his golf game is improving.

Data Sources

Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 23 December 2014. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 1 December 2014.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold by Sales Price: U.S. Total (2002-present). [PDF Document]. Accessed 1 December 2014.