Vehicle sales are rolling fast and are on pace to reach the highest mark since 2006. Considering an automobile purchase is typically the second most expensive expenditure item for most households, what does it imply about the most expensive expenditure of home sales?
In November, vehicle sales were running at 17.2 million annualized pace. The 11 months of sales this year are at 16.5 million annualized pace. The last time the annual total was this high was way back in 2006.
An improving economy with around 200,000 net new job additions each month and all-time high household wealth conditions are helping fuel auto sales. Falling gasoline prices surely help with sales as well.
Note the graph below charting home sales and vehicle sales. Both industries underwent a harsh downturn in around 2007 to 2008. From the low points, both sectors are making a comeback. A closer look shows that the vehicle sales have climbed out more robustly compared to home sales. Does it then mean that home sales are primed for stronger growth in the upcoming year to “catch-up” with past relationship between these two sectors?
Gasoline prices have fallen by more than 20 percent from the average price of the past 3 years. This trend may be enticing people to drive more and buy a new car. But gasoline prices are volatile, as can be seen in the graph below. No one can know for sure, but the recent slides in gasoline price could easily reverse and quickly climb higher. This point is worth noting because home sales in the outlying exurbs, requiring long commutes, did well in the past when gasoline prices were low but suffered significant declines when gasoline prices sharply increased. So even in broadly improving housing market conditions, the relative performance between the exurbs versus inner neighborhoods will depend on future gasoline prices.
There are many factors leading to likely higher home sales next year, including continuing job gains, rising rents, increased inventory, and some dialing-down on mortgage underwriting standards. Consumer confidence will also matter for major expenditures like cars and houses. Recent gains in vehicle sales are clearly encouraging signs about the likely direction of home sales.
As an aside, what did we do before cars? We had to walk, naturally. There is an elementary school on a top of a steep hill in one small town in South Korea. The graduates of this school all have large muscular thighs. Interesting that how small everyday unnoticed habitual activity accumulates over time into something unique. What “unnoticed” activity do you do every day? Something to consider.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.