According to the National Association of Home Builders (NAHB), new single-family home sales fell again in the month of September — down 5.5% from August and 13.2% below the pace from a year ago. Sales in the Midwest Region increased by 6.9% from August and 4.1% from a year ago. The other three regions did not fare as well. Sales in the South — the largest region by volume of sales — were down 1.5% from August and 11.4% from year ago. New sales in the Western Region fell 12% month-to-month and 15.8% from a year ago. Finally, all other declines were dwarfed by the Northeast Region (smallest by sales volume) where new sales fell by a whopping 40.6% from the month of August and 51.3% from a year ago.
Several factors have likely contributed to the decline in new home sales. Two primary factors are slowly rising interest rates and housing prices that continue to increase. The Fed has been tightening to the tune of a quarter percentage point each quarter for over a year now, this in addition to the central bank selling assets to the amount of about $40-$50 billion each month in an attempt to unwind much of its balance sheet. Both policies have had the effect of squeezing credit markets and slowing the rate of lending for real estate. This, in turn, has slowed the pace of new housing construction.
The housing market’s rebound from the 2008 crash, and — salient to the topic at hand — the recent slowdown in new sales that can be seen in 2018. While new housing construction has observably slowed by a significant amount in 2018, the median sales price of new homes is at best suffering from a slight disinflation of price increases.
Despite the recent market slowdown, analysts do not yet fear a crash anything like the one experienced a decade ago. The Chairman of the National Association of Home Builders, Randy Noel, argues that the dip in the market is just a blip, because “[s]ales are up from this time last year and builders continue to report consumer interest in housing.” Year-to-year, new home sales have actually decreased 13.2%; however, the NAHB Chief Economist argues that while “[b]uilders need to provide homes at different price points to address these affordability concerns,” it remains the case that “overall job and economic growth should help support the housing market in the months ahead as it adjusts to higher mortgage interest rates.”
Much of this optimism is driven by a belief that the fundamentals of the market are sound, and most other indicators are up. The economy is experiencing the tightest labor market in years, steadily rising incomes, and high levels of consumer confidence. One cannot help but remember, however, the infamous words of then Federal Reserve Chairman Ben Bernanke in mid-2005 (at the peak of the housing bubble), when he was asked by an interviewer whether he thought the explosion in housing prices and new construction might be a bubble:
Well, unquestionably, housing prices are up quite a bit; I think it’s important to note that fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places . . . I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy [emphasis added].”
The market may well be sound this time; but as housing prices continue to climb in the wake of affordability issues and slowing sales we should at least be wary that market fundamentals might once again show us how “this time is different” is really just more of the same.