New home sales strengthen in August despite price sticker shock

New home sales strengthen in August despite price sticker shock

*New one family home sales edged up to 740k following July’s upwardly revised 729k but remain below January’s 993k peak, reflecting high prices which have restrained demand for new homes despite low interest rates (Chart 1). Housing activity remains strong although surging prices may be cooling the appetite for purchases going forward.

*Tightness in the housing market is highlighted by Fannie Mae’s national housing survey: 63% of respondents believe it is a bad time to buy a house, a modest improvement from 66% in July (Chart 2). Despite the negative sentiment, the Mortgage Bankers Association’s mortgage applications for home purchases volume index has increased in five of the last seven weeks and is up 12.7% since July. The number of new one-family homes for sale rose 3.3% m/m and 32.2% yr/yr, reflecting the sharp rise in housing starts last year. The months supply of new one-family homes at the current sales rate ticked up to 6.1 months, a full month greater than the months supply in January 2020.

*Housing starts rose 61k to 1.61 million although they remain modestly below June’s 1.66 million high, in part due to supply constraints (Chart 3). Building permits rose by a sharp 5.6% to a 4-month high of 1.73 million as home builders strive to meet demand (Chart 4). Shortages of building materials continue to weigh on the housing industry, highlighted by the 1.7% rise in the number of houses under construction to 1.4 million, its highest level since May 2006 while housing completions declined 60k.

*Construction costs have continued to spike, jumping 1.3% m/m and lifting the yr/yr increase to 12.8% following a 1.7% m/m surge in July (Chart 5). The strong demand for homes is giving builders the flexibility to pass on increased costs to home purchasers. Despite a decline in lumber prices from all-time highs in May 2021, prices to many homebuilders remain high and there are shortages of other building materials that have hampered construction. The National Association of Home Builders notes: “The September data show stability as some building material cost challenges ease, particularly for softwood lumber. However, delivery times remain extended and the chronic construction labor shortage is expected to persist.”

*Existing home sales fell 2% to 5.9 million, 11% below their January peak in part due to housing supply shortages which have lifted home prices and dampened demand (Chart 6). Median existing homes sales prices fell for the second consecutive month partly due to seasonal factors but remain just 6k dollars short of June’s record high of $363,000 (Chart 7).

*We expect strong activity in the housing market to continue and to contribute significantly to economic activity through several channels, including rising employment in the construction industry, increased consumption of durable goods (furniture, home appliances, etc.), a wealth effect due to elevated home prices, and through home transfer costs (commissions, title search and insurance, etc.) which are reflected in GDP.

Chart 1: New 1-Family Houses Sold

Chart 2: Fannie Mae National Housing Survey

Chart 3: U.S. Housing Starts

Chart 4: Total building permits

Chart 5: Construction Price Index (yr/yr % change)

Chart 6: Existing home sales

Chart 7: Existing homes median sales price (not seasonally adjusted)

Mickey Levy, mickey.levy@berenberg-us.com

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