Housing and Real Estate – Easy Pod (July 2, 2013)
Housing and real estate were at the center of the most recent financial crisis, so it should be obvious why it is an important part of our economy …
For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end. You can review any charts/graphs afterward. I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …
NOTE: You may be reading an outdated analysis. Please see my latest Housing and Real Estate Easy Pod for more info.
I’m continuing with a feature called “Easy Pod” – a collection of indicators that help portray the current status of something. In this post, that something is housing and real estate. Let’s first review a few key concepts that are important to know about housing and real estate: (you can skip to below the first horizontal line if you’ve read this Easy Pod in the past)
- There are two basic kinds of real estate, residential and non-residential. Residential refers to places where people live. Non-residential includes things like businesses, office buildings or warehouses.
- For residential real estate (this is what we’ll refer to as “housing”) there are new homes and existing homes. The difference should be fairly obvious. New homes are looking for their first owner, while existing homes already have an owner.
- “Inventory” is how many of something you have available to sell. When we talk about the current inventory of new homes, we are talking about how many new homes are available to be sold. When inventory is high, that makes it more likely that prices will be lower. Remember, it’s the “supply and demand” basics here. If you have too much of something, people will pay less for it. The way we try to measure inventory in housing is by comparing how many unsold homes there are versus how fast homes are selling. That’s why you’ll see things like “8 months inventory.” It means that, at the current rate of home sales, it would take 8 months to get rid of the extra inventory.
- Sales levels and prices are definitely related to one another. If you see home sales slowing down, it means that homes are not in as much demand, so chances are good that prices will go down. You have to look at the combination of housing prices, sales and inventory to get a good feel for what’s going on.
There are a number of indicators that describe what’s going on in housing and real estate, and there are even some people who combine these indicators into one number (an index) to give a summary. In this “Easy Pod” I will show you indicators and indices that I like to follow. Check back regularly for updates.
Previous Easy Pod: November 1, 2013
Indicator: New Home Sales | NEGATIVE
Easy Intro: None yet | Link to Source: Click here | Latest Date This Info Represents: May 2014
Quick ‘n Easy
Every new home that is built and sold adds to the Gross Domestic Product (GDP), helping our economy grow. Unfortunately, in May 2014, new homes were selling at an extremely low rate. The good news is that the trend has generally been pointed upward since early 2011. Fortunately, not too many new homes are being built so that the ones in inventory (still on the market) can get cleared out at a normal pace.
Easy Description: Statistics that tell us how many new single-family homes (basically a building for one family, not apartments or condos) were sold. It also tells us about the selling price of those homes and the unsold inventory of new homes (waiting to be sold).
Latest Reading: If sales in May 2014 were to continue at that rate for a whole year, there would be 504,000 new homes sold. This “annualized” rate is 18.6 percent higher than last month’s revised rate, and it is 16.9 percent above the rate from the same month last year. The median sales price (half of homes sold for less than this amount, the other half sold for more) was $282,000. That is 6.9 percent higher than the median price one year ago. There were 189,000 new homes still for sale (inventory), so at the current pace it would take about 4.5 months to sell the remainder.
Also, take a look at my latest new residential homes inventory months of supply trend analysis to see where the trends are headed.
Implications: After hitting an interim low of 270,000 in Feb 2011, the pace of new home sales has been generally rising (with some big ups and downs). We’re still a long way off from a normal level, but we appear to be on the mend.
The “4.5 months of inventory” part is key to understanding that home builders have done a pretty good job of adjusting to market conditions. Because so few homes were being sold after the big recession hit, they dropped the number of homes they built way down, which means that supply decreased and prices didn’t decrease as much. (Quick refresher on “supply and demand” – when something has a bigger supply than there is a demand for it, sellers are forced to lower the price so that buyers will have a greater willingness to buy it.) We were at very low levels of new home construction, which is why that inventory months of supply figure is not way above historical averages anymore. Before the housing boom, the typical months of inventory level was around 6 months. At the 6 months level, prices tend to be stable.
So, what about the fact that new homes are generally being sold more often these days than during the housing crash? Builders have started making more homes, which will eventually push up supply enough to keep up with the new demand so that prices don’t move too much in one direction or the other. The kind of massive price increases we saw in the housing boom were unsustainable, just as massive price decreases from this point onward would have to be temporary, too. Market forces will always push things toward a “healthy” equilibrium.
But regardless of the fact that the inventory number is looking pretty decent, this number of sales (504,000 annualized rate) is still way too low. And when fewer homes are being sold, that’s less economic growth. The sale of a new home is just like the sale of a car, television or clothes – someone made something and sold it, which adds to the GDP. What we’d like to see from here is a continued increase in new home sales numbers while keeping that months of inventory right around the 6 month mark. That would mean the housing market is on its way to greater positive contributions to the GDP report without having any false imbalances in the system.
Easynomics Rating Methodology: The long term average is about 672,000 new homes sold per year. I’d like to see numbers that are within 15 percent of that average. Therefore, I will give this indicator a rating based on the average of the last three months’ annual selling pace: Above 772,000 is “positive”; below 571,000 is “negative”; anything between is “neutral.”