US: New Home Sales Remain on the Slow Track

New Home Sales Continue to Struggle

July’s 2.4 percent drop in home sales is clearly disappointing. The July data, which included upward revisions to the three previous months’ data, essentially closes the books on another disappointing spring home buying season. Sales for the spring look slightly better than they did one month ago, with the net upward revision to sales for the previous three months totaling 33,000 homes.

Even with the upward revisions, sales through the first seven months of this year trail their year-ago pace by 1.8 percent. The largest gaps are in the Northeast and West, where new home sales through July are running 19.1 percent and 10.9 percent below the same period last year. By contrast, new home sales for the first 7 months of the year are off just 3.1 percent in the Midwest and are up 5.4 percent in the South. The South was also the only region that reported a rise in new home sales during July, with sales increasing 8.1 percent during the month.

While July’s new home sales numbers are disappointing, there is much more going on in the new home market than the sales numbers suggest. Builders have generally had a tough time securing lots during this recovery and land development has lagged. As a result, builders are concentrating more of their efforts on the upper and lower ends of the market, depending on where they can secure suitable building sites. The lack of building sites has also contributed to the run-up in new home prices during recent years, particularly the average price of a new home, which hit a new high in July. Inventories of new homes have risen relative to sales, however, and that is beginning to restrain pricing power. The number of homes available for sale rose 4.1 percent in July to 205,000 homes. This marks the highest level of inventories since August 2010 and brings the months’ supply of homes back to 6.0 months, which is close to its long-term norm.

The rise in new home inventories is already causing prices to moderate. Following gains of 11.1 percent and 9.7 percent in 2013, the average price of a new home has risen just 2.8 percent over the past year, while the median price is up 2.9 percent. Although new home inventories have increased in recent months, they remain near historic lows in an absolute sense. Much of the increase in new home inventories has come in the under- construction category, which has increased 17.5 percent to 121,000 homes. The number of completed homes for sale at the end of July is up 33 percent from a year-ago, rising 12,000 units to 48,000 homes.

The weaker new home sales numbers and rise in new home inventories will cause us to slightly trim our 2014 and 2015 forecast for new home sales and single-family starts. New home sales will still likely post a modest year-to- year gain, however, as we approach lower year-to-year comparable figures.