Home sales of newly constructed homes rose solidly in December. The latest tally is the second highest monthly sales pace in nearly eight years. The annual total is the best in nearly a decade. The gain also affirms the continuing housing recovery and one key reason as to why the U.S. economy will avoid recession in 2016.
Specifically, new home sales rose 10.8 percent from the prior month after accounting for seasonal adjustments. Moreover, the sales were higher by 9.9 percent from one year ago. The sales pace of 544,000 is the second highest monthly tally since 2008. Despite the seemingly impressive figures, it is also worth noting that new homes of 800,000 to 900,000 had been the norm before the housing market bubble and crash. Therefore, there is still a plenty of room to grow.
The median price of newly constructed homes was $288,900. This is lower than a year ago, but reflects not depreciation in home price but rather homebuilders’ focus in recent months on the starter home market. The price for the year as whole set a new record of $293,600 in 2015, a gain of 3.8 percent from one year ago.
The price of existing home has been rising faster in recent months, but the gap between new home price and existing home price still remains wider than normal. Since homebuilders have to account for the cost of labor, materials, lot purchase, and some profits there is not much room for the newly constructed home price to fall. This means, existing home prices need to rise at a faster rate for the foreseeable future to narrow the price gap back to historical normal.
Homebuilders are finding buyers fast – about 3 months. Yet, the puzzle remains as to why the homebuilders cannot quickly ramp up production. The accessibility of construction loans from community banks continues to be a struggle because of many new financial regulations. Also, even for those who are able to get the loan, finding qualified construction workers have been very difficult despite the high wages. This trend begs the question as to why there are so many people of working age not in the labor force when the construction industry needs them.
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.