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Tuesday, December 29, 2015

November 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes in November added to October gains, rising by 20,000 units (+4.3%) to a seasonally adjusted and annualized rate (SAAR) of 490,000 units -- shy of the 503,000 expected. Moreover, October’s increase was trimmed by 42%, to just 28,000 units. Year-to-date (YTD), sales were 13.4% above the same months in 2014. For a longer perspective, November sales were roughly 65% below the “bubble” peak and about 35% below the long-term, pre-2000 average. Because sales increased more quickly than single-family starts, the three-month average ratio of starts to sales rose to 1.57 -- above the average (1.41) since January 1995. It is interesting to note that sales have been trending lower since February while starts have been trending upward.
Meanwhile, the median price of new homes sold jumped by $18,100 (+6.3%), to $305,000 in November; however, that is $5,400 short of September’s all-time nominal high of $310,400. The average price of homes sold rose by $16,800 (+4.7%), to $374,900; the equivalence between increases in the median and average prices might suggest a better balance between lower- and higher-priced homes, but that is not the case. In fact, the proportion of “starter” homes (those priced below $200,000) was the lowest (11.8%) of any November on record (going back to 2002); prior to the Great Recession starter homes comprised as much as a 61% share of total sales. 
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As mentioned in our post about housing permits, starts and completions in November, single-unit completions edged up by 2,000 units (+0.3%). Because of slower completions compared to sales, new-home inventory expanded in absolute terms (+5,000 units); interestingly, however, it shrank in months-of-inventory (-0.1 month) terms. 
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Existing home sales tumbled in November (-560,000 units or 10.5%) to 4.76 million units (SAAR); that result was considerably below expectations of 5.30 million. November’s activity was the slowest since April 2014, the largest month-to-month decline since July 2010, and the worst October-to-November retreat on record. Regulatory changes affecting real estate closings (known as the “Know before You Owe” rule) that went into effect in early October were blamed for the drop in sales; there may be a grain of truth to that claim, but one would think the rule change would have similarly dented new home sales. Inventory of existing homes contracted in absolute (-70,000 units) terms but expanded in months-of-inventory terms (+0.3 month). Because sales of new homes rose while existing homes fell, the share of total sales comprised of new homes increased to 9.3%. The median price of previously owned homes sold in November turned higher (+$1,200 or 0.5%), to $220,300. 
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Housing affordability improved again in October, as the median price of existing homes for sale retreated by $2,100 (-0.9%) to $221,200. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.1% (+5.2% compared to a year earlier).
“Generally good economic conditions continue to support gains in home prices,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Among the positive factors are consumers’ expectations of low inflation and further economic growth as well as recent increases in residential construction including single family housing starts. Inventories of existing homes have averaged around a five month supply for the past year, a level that suggests a fairly tight market with limited supplies. Sales of new single family homes, despite recent increases in construction, remain mixed to soft compared to the trend in existing home sales.
“The recent action by the Federal Reserve raising the Fed funds target rate by 0.25% and spreading expectations of further increases during 2016 are leading some to wonder if mortgage interest rate might rise. Typically, increases in short term interest rates lead to smaller increases in long term interest rates… From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25%; over the same period, the mortgage rate rose from about 6% to 6.75% during a sustained tightening effort by the Federal Reserve. The latest economic projections published by the Fed following the recent rate increase suggest that the Fed funds rate will be around 2.6% in September 2017 compared to a current rate of about 0.5%. These data suggest that potential home buyers need not fear runaway mortgage interest rates.” 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

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