Contracts to buy a newly constructed home soared in February, portending a solid demand going into the spring home buying season. One reason is due to builders bringing less-expensive homes onto the market.
Diving into the numbers, new home sales hit 539,000 (annualized pace), which is a big increase of 25 percent from one year ago and marks the highest sales pace since February 2008. The median price of a new home was $275,500, which is less than $300,000 of recent past months. This implies that slightly lower price points are very popular with buyers.
Even with the latest big gain, new home sales and housing starts (the construction of all new homes) remain well below the levels of 2000. There is indeed much room for further growth. NAR expects new home sales to rise 30 to 35 percent in 2015.
The average time to move a property is quick. It took only 3.5 months to find a buyer.
The gap between new home price and existing home price is still rather large. This is good news for homeowners since it is implying that existing home price is in a better position to rise in order to close the gap. The higher cost of construction makes it difficult to lower the price of new homes.
New home sales data does not measure closing activity. Rather it measures contract signings, much like NAR’s pending home sales data. Also, not all single-family housing starts lead to new home sale contract signings. Those new homes initiated at the owner’s request are not included in the new home sales data though are included in the housing starts data.
Home prices for both new and existing homes have been rising much faster than income. Moreover, rent gains have also been easily outpacing income growth. The only way to tame the strong rise in housing costs is to produce more new homes. Unfortunately, many small-sized local homebuilders are still having hard time obtaining construction loans (even though homes are selling quickly and therefore carrying very low risk of a default). Local community banks have indicated burdensome new regulations arising out of Dodd-Frank rules as to the reason why construction loans cannot easily be made. Since one of the original goals of Dodd-Frank was to prevent systemic risk in the financial sector, there could be an exemption to regulation for smaller-sized lenders. After all small banks are in a very competitive industry and bankruptcies by a few small banks do not cause a systemic risk of taking down the whole economy. The exemption of small banks from Dodd-Frank rules should therefore be seriously considered. Otherwise, many Americans could choke on rising housing costs.
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.