The US new housing market fell for the third successive month in March. Sales of newly built homes drop 1.5% since February, reaching $511K, short of the economist prediction of $520K for the said month.
Three-Month Decline Focused In The West
Reluctance from American homebuyers resulted in a slump in the US housing market in the first three months of 2016. However, a decrease in demand is concentrated in the West, which is already at its lowest levels of consumer demand since July 2014.
New home sales tumbled in the Western states with a 23.6% drop in March. Sales in the Midwest and South both recorded their strongest three-month gains while the Northeast remained stable.
The housing market in the West is more unpredictable as one of the most expensive housing markets in the US frequently showing fluctuating sales figures. This could explain the disparity in sales figures across different parts of the country.
Home Price Increases, Slow Wage Growth, Skill Shortages
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The impact of home price increases on sales is amplified with slow wage growth across the US.
Combined with skills shortages across the construction industry, leading to inflated labor costs will cause the prices of newly built homes will increase.
Employment across the country has grown over the last year, with monthly payrolls reaching an average of 234,000. However, wage growth has been slow, and since 2009 has remained steady at around 2% to 2.5%. Rates of unemployment are approaching an eight-year low, at around 5%.
Construction of new homes declined in March, falling 8.8% to the slowest building rate since October 2015. Applications for permits also fell, indicating a potential slump in future construction.
Conversely, the median new home price fell to $288,000 in the month of March, down 1.8% from the same time in 2015.
Some economists suggest that an unusually warm winter allowed for increased construction, the benefits of which may be seen in the spring. If sales pick up in the coming months, low median house prices are expected to rise.
New Homes vs. Previously Owned Homes
Despite a slump in new home sales, there has been a significant improvement in the sales of previously owned dwellings, which increased to 5.1% throughout March. At odds with reports on new home sales, existing homes have seen an increase in sales across all major regions of the US.
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First-time buyers seem to have an interest in purchasing existing dwellings, although at all-time lows. First homebuyers account for approximately 30% of existing dwelling sales.
While new homes make up only about 10% of the US housing market, the importance of new home building is seen through the benefits it brings to job creation, with increased construction, and higher demand for primary materials such as bricks and lumber.
Increase In Inventories Highest Since September
Inventory has increased with the current sales rate the highest since September 2015, a sign that home sales could bounce back in the coming months. The overall number of new homes on the US housing market at the end of March is the highest since September 2009, with 246,000 new homes.
In February, sales patterns suggested new homes on the market would be exhausted in 5.6 months. The current rate of sale has improved significantly, with new homes now estimated to be exhausted in 5.8 months.
Borrowing Costs at a Three-Year Low
More Americans will have access to home ownership with mortgage costs approaching a three-year low.
Mortgage rates in April for the last five years demonstrate the nearing three-year low, according to data from Freddie Mac:
- 5th April 2012 3.98%
- 4th April 2013 3.54%
- 3rd April 2014 4.41%
- 9th April 2015 3.66%
- 7th April 2016 3.59%
The mean rate for a fixed 30-year home loan is 3.59%, after holding a rate of 3.97% at the beginning of 2016.
Long Term Trends: Reluctant Homebuyers, Reduction in Demand
The overall trend in the US housing market suggests that US homebuyers are exhibiting reluctance, resulting in constrained demand for new homes.
While demand is higher compared to recent years, long-term trend forecasts demonstrate an overall reduction in demand.
Despite a three-month drop in sales recorded in March, annual trends indicate that the market is still likely to exceed the record of 501,000 newly built homes in 2015.
These levels are strongest since the Global Financial Crisis in 2007, demonstrating long-term progress across the industry.
Where the Market is Heading: Economic Predictions
Despite a dawdling market for new home sales, Oxford Economics economist Gregory Daco believes there will be a revival in the housing market as spring approaches, citing income growth and constrained demand as positive factors.
Likewise, analysts remain confident the US housing market will see a revival, with economists citing the volatility of monthly sales figures in comparison with long-term trends.
Low borrowing costs, reduced unemployment and a strong labor market are fundamental strengths in the housing market. Moreover, the primary challenge is a shortage of houses on the market, despite record increases in inventory.