December New Home Sales Rise: Housing on Strong Footing?
New home sales jumped in December coming above expectations. The encouraging data clearly indicates that housing recovery remains strong even though the economy slowed down slightly toward the end of 2015 amid global worries, weakness in China, slumping oil prices and a strong dollar.
Data released by the U.S. Census Bureau and the Department of Housing and Urban Development on Jan 27 showed that sales of new single-family homes increased 10.8% to a seasonally adjusted annual rate of 544,000 units in December from a revised November rate of 491,000. The number represents a 9.9% improvement year over year.
New home inventory for sale was 237,000 units at the end of December — the highest in 2015 — up 2.6% from the previous month. This is a 5.2-month supply at the current sales pace, down from the November levels. The median sales price declined around 4.3% year over year to $288,900 in December.
Recent housing data has been rather mixed. Housing starts declined 2.5% while building permits fell 3.9% in Dec 2015, per data released on Jan 20. Moreover, data released by the National Association of Home Builders (NAHB) showed that homebuilders’ sentiment index remained steady at 60 in January. However, existing home sales rebounded strongly in December, rising 14.7% from November, per data released by the National Association of Realtors earlier this month.
2015 was more or less a good year for the housing market, possibly the best since 2007 when the housing recession set in. After a lull in the U.S. housing market in the first quarter, sales picked up in the ensuing months supported by improving economic environment and better employment picture. Job and wage growth, a recovering economy and improving consumer confidence, moderating home price gains, affordable interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory, point to a continued strong demand in 2016.
However, major concerns for homebuilders like PulteGroup, Inc. PHM, KB Home KBH, Lennar Corp. LEN and D.R. Horton, Inc. DHI are the recent labor shortages and rising land and labor costs. These lower margins and limit pricing power of the homebuilders.
The tightening labor market along with limited availability arrested the rapid growth in housing production. Limited capital for land and land development has left entitled lands in short supply. This shortage is limiting home production and lowering the inventory of homes, both new and existing. While labor shortages are driving up wages, land prices are inflating due to limited availability.
Moreover, with the Fed announcing a hike in the benchmark Federal Funds target rate in December — for the first time since 2006 — mortgage rates will probably rise. High mortgage rates dilute the demand for new homes as loans become expensive. This lowers buyers’ purchasing power and hurts volumes, revenues and profits of homebuilders.
Nonetheless, the overall fundamentals of the all-important construction sector remains strong and sales are expected to pick up as the spring selling season sets in. Also, in case mortgage rates rise with the interest rate hike, we believe they should still be reasonable, keeping housing affordable.
Modest hikes in interest rates amid an improving economic environment can be a net positive for the housing sector. Stronger general economic conditions can encourage consumers to form new households, leading to higher housing demand.
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