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The façade of a recovering housing market: New home sales collapse and supply of inventory finally reaches six months. » Dr. Housing Bubble Blog

April 24, 2014

The façade of a recovering housing market: New home sales collapse and supply of inventory finally reaches six months.

New home sales had a horrible reading in the latest set of data. Hard to blame the polar vortex on this one since the only area in the country that saw a jump in sales was in the frigid Northeast but what of the other areas? Of course what the press fails to recognize is that Americans for the most part are too broke to afford homes at current investor inflated prices. Since more than 30 percent of all sales since 2008 were going to the investor class, this group pulling back is showing how solvent most households truly are. Some people assume that millions of holed up Millennials will emerge from their parent’s basement only to flood the market with an unrelenting appetite to purchase homes. First, many of these young adults don’t even have the incomes to cover rents in more expensive zip codes forget about purchasing a home. So it is no surprise that new home sales fully collapsed last month. The West had the second biggest monthly decline and we are flat out in a drought! Definitely can’t blame the weather here. What you can blame is affordability and with investors slowly pulling back, we will now find out the ability of the housing market to stand on its own two feet with more traditional buyers.

 

New home sales hit a wall

New home sales plunged dramatically on the latest sales report. It should be obvious that affordability is a big problem even with juiced up interest rates that have turned on those house horny investors. Yet even hormones can’t justify prices in many markets and we are seeing a pullback. It is becoming harder and harder to justify current prices in many markets. Sure, people are still paying high prices but the lemmings are slowly waking up and inventory is growing. Builders need to think long-term and they are certainly not taking a big dive after this report.

First, take a look at how deep the dive was in new home sales:

New Home Sales by Region

So much for the weather being an excuse. New home sales fell 14.5 percent nationwide. Prices are simply too high for many traditional buyers across the country. To put this into context you also have to see how pathetically low new home sales have been:

new home sales

Where is the housing recovery? This chart is indicative of the massive demand investors have for lower priced foreclosures and distressed homes. You know, the graveyard of 7,000,000 foreclosures that all of a sudden people have forgotten? New homes are more expensive and tend to rely on traditional home buyers. As we have said, with incomes going stagnant this is a big deal. You rarely find flippers or investors buying up new homes. The chart above highlights this trend and reflects the massive demand from investors for existing home sales. They have crowded out regular buyers since 2008 and are largely responsible for the big rise in prices last year.

Inventory creeping back up

Since investors are pulling back and many households are priced out of the market, inventory is slowly creeping back. We have now reached a 6 month of supply in the housing market (6 months tends to be the “normal” balance point between buyers and sellers but good luck trying to claim this market as normal):

months of supply

The last time we had 6 months of supply was back in 2011. People are still house horny and would like to purchase a champagne house on a beer budget. I doubt people really run the numbers that carefully when making a big purchase. Most will take the max a bank will give them. Thankfully today, we actually have some due diligence in the market. Investors circumvent this process with their large pools of money but it is clear that many are starting to pullback.

The recovery was largely driven by artificially low interest rates (Fed members are seeing higher rates shortly), low inventory (creeping back up), and investors (demand is waning). These are the three big groups pushing prices up since the housing crash hit. People assume pent up demand is going to flood the market and fill the gap left by investors. Where is this demand? Millennials? Doesn’t seem like it since many are also in debt up to their eyeballs in student debt and their incomes are not so hot. Typically rising prices in housing would lead to a healthy response by builders to add more supply. Instead, many builders have been building multi-family rental housing. This is a new trend just like the sustained flood of big money in single family homes, or the Fed’s uncharted QE adventure, or the pricing out of the middle class from the bedrock of their wealth, housing. The collapse of new home sales and the rise in existing supply should be expected given the weak growth in household incomes.

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