As we start to receive the data for the first fiscal quarter of 2019, there have been conflicting indications of the current strength of the housing market in the U.S.
At a macro level, the American economy is in good shape, and the strength of the economy tends to be a solid leading indicator for the health of the housing market.
The Fed has held off on increasing interest rates, contributing to a decrease in mortgage rates; job numbers continue to come in above forecasted; and wages are finally starting to grow in real terms.
Confidence in the economy and improvements in one’s finances should spur home sales and increased activity in the housing market. However, not all the Q1 figures released have painted such a rosy picture of the current state of affairs.
A report on new residential home sales released by the U.S. Census Bureau at the end of March was a positive indicator for the U.S. housing market.[1]
The report indicated that there were 667,000 new houses sold in the U.S. (the seasonally adjusted annual rate) during February of 2019, an increase of almost 5% over the January figure.
This figure is also an 11-month high. Economists polled by Reuters had forecast that the figure would be closer to 620,000.[2]
As the graph above indicates, new home sales peaked at just over 700,000 at the end of 2017 but dropped sharply in 2018. The trend looks optimistic as we head into 2019, though.
However, new home sales are just one indicator – we also need to factor in existing home sales, which are a much more significant percentage of total home sales in the U.S.
It is important to note that there is a slight difference in the definition used by the two organizations that produce the new and existing home sales reports.
The different purposes can lead to timing differences, and it is generally understood that recent home sales usually lead existing home sales by one or two months.
There was a surge in existing home sales for February, which recorded the most significant month-over-month gain in over three years.
The National Association of Realtors (NAR) reported that total existing home sales were 5.51 million (seasonally adjusted annual rate), an increase of almost 12% over January.[3]
These incredibly upbeat housing market figures led Lawrence Yun, chief economist at the NAR, to comment that “a powerful combination of lower mortgage rates, more inventory, rising income, and higher consumer confidence is driving the sales rebound.” [4]
It is undoubtedly true that mortgage rates have come down significantly in the last 12 months. The FED’s decision to slow down its monetary policy tightening has been the primary cause.
The Fed Funds Rate increased to 2.5% in late 2018, but then comments by the board indicated that this was to be the last increase for the foreseeable future.
This messaging was a positive sign for investors and mortgage lenders alike.
If the borrowing rate continues to decrease, then this should spur more increases in housing market activity as mortgages become more affordable.
People also tend to react positively to the increased certainty from the Fed’s messaging. In 2018, there was uncertainty surrounding how high the interest rates could go under the new chairman.
As Yun theorizes, the trend of decreasing mortgage rates is not the only factor that should lead to increased home sales this year.
Economic fundamentals, such as the historically low unemployment rate, continued growth in job numbers, and rising wages, should also contribute.
Unfortunately, the existing home sales report for March 2019 did not continue this positive trend.
On April 22, the NAR reported that sales had slipped by almost 5% in March compared to February and that sales were down 5.4% from the March figure in 2018.[5]
As mentioned above, this blip may correct itself due to the timing differences between new and existing home sales data. However, the housing market does not reflect the current economy’s strength.
More bad news for this sector of the economy has been the reluctance of homebuilding numbers to join in the fun.
For March of this year, housing starts dropped slightly from February to 1.139 million units, and data for February was revised downwards as well.
The possible explanations for the lack of new construction in residential properties are increases in labor costs and the costs of raw materials.
The increased tariffs that have been placed on certain goods coming into the country have been tough for some companies to bear. In addition, while rising wages are good for house demand, it is another cost that construction companies must pay.
New starts are essential to monitor because the housing market relies on a good inventory of new homes.
As we head into the second quarter of 2019, it will be interesting to see how the house sales figures will come in. Many U.S. economic indicators indicate an increase in housing activity, but the housing market has shown a stubborn unwillingness to grow in line with the economy.
[1] https://www.census.gov/construction/nrs/pdf/newressales.pdf
[2] https://www.cnbc.com/2019/03/29/new-home-sales-february.html
[3, 4, 5] https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales