The upward pressure on US home prices is being driven more by supply than demand. And this is lifting the housing sector of late:
• Momentum in US sales of both new and existing homes;
• Post-bubble burst, price has appreciated much faster than sales improvement; and,
• Builders express optimism but are cautious in starting construction; inventory well-behaved.
Sales of existing homes rose 5.1 per cent month-over-month and 9.2 per cent year-over-year to a seasonally adjusted annual rate of 5.35 million units – the strongest since 5.38 million in July 2013.
Sales of new homes came in at 546,000 units (SAAR) – up 2.2 per cent m/m and 19.5 per cent y/y. They were the highest since February 2008. New home sales for the prior three months were all revised higher.
Both these reports point to the prevailing momentum.
In a larger sense, however, sales remain tentative. Sales of existing homes are just back to 1999 levels. Since early 1999, the US population has grown by 43 million, and there are 11 million more households. Similarly, the 12-month average of new-home sales in May was 482,000 units, matching the level of December 2008. In 2003-2006, new-home sales were north of a million units a year – we are talking bubble times. The annual average between 1963 and 2002, is 649,000 units sold each year – higher than what builders have been selling currently.
House price, meanwhile, is performing much better than sales. The median price of both new and existing homes has seen quite a recovery since it plunged after the bubble burst. The price of a new home peaked at US$262,600 in March 2007. Last November, new homes sold for US$302,700 – an all-time high (May was US$282,800).
US Housing Analysis
For existing homes, the record was US$230,400, reached in July 2006. In May, prices rose 4.6 per cent m/m, to US$228,700, merely 0.7 per cent away from the 2006 peak.
It is obvious the spike in the price is not demand-driven. It is primarily coming from the supply side.
The result of all this is downward pressure on inventory of homes. At the current pace of sales, months’ supply in both new and existing homes is low – four and 5.1 months, respectively. For instance, there were 2.29 million existing homes in inventory in May, up from 1.86 million in January but down from 2.35 million last July; inventory peaked in 3.91 million in October 2007.
The risk to housing momentum may not be coming from inventory. Of course, if and when sales weaken, the months’ supply metric can/will rise fast.