Jack Dunn - Reclaiming Common Sense

New Home Sales are an economic stimulus

New home sales act as an economic stimulus. New home sales cause more homes to be constructed. New home sales can spur people with existing homes to place them up for sale as the purchase their dream home. People new furnishings, new appliances, new electronics, new home and garden material for their new or existing homes. New construction spurs the creation of new jobs for construction workers, lenders, Realtors, appraisers, movers and others. Last week's new construction data was better than expected with September Starts, Under Construction, and Completions data all beating expectations, hitting the highest levels, plural,  for September seen since 2008. The new construction forecast article questioned the amount of impact that the recent hurricanes would have on construction and sales of new homes. We have had a "surplus" of over 1.0 million units under construction for a protracted period of time. We have had a dearth of inventory in the existing home market from an equally protracted period of time. How much new inventory is going to satiate the appetite for existing homes? How much new construction inventory was damaged in the hurricanes. How much existing home inventory was damaged. How many workers are going to be used to renovate new and existing homes damaged in the hurricanes? The forecast article was anticipating higher levels of September sales as compared to 2016, with a potential of 50,000 units sold, and another potential record average sales price for the month of September.

New Record for September Average Sales Price. Builders and Realtors think in $5000, $25,000 and $100,000 increments. It was though that maybe we could see $379,900 or $384,900 for an Average Sales Price this month. Either would have been a record level for September. We saw the average sales price hit $385,200. The median sales price this September was slightly lower than last September at $319,7000.

September Sales are up by 50% over September 2015. We saw 52,000 new construction units sold this past month. This was comparable to September 2008 (53,000) and better than 1983 (48,000) and 1992 (51,000.) The 1983 and 1992 benchmarks are familiar to the readers of this column. The good news is that if we are at 1992 levels then we may have 13 more years of expansion ahead of us. We saw almost a 20% "pop" compared to last September (18.18%.)

We have sold 599,000 new construction units during the past 12 months. The "Running Year or Rolling Year (RY) data indicates where we have been. We are doing better now than we have done since the Summer of 2008. This is similar to what was found in the new construction report. The RY value for 1983 was 590 units. The RY value for 1992 was 592. We are doing better than both of those benchmark years.

We have sold 474,000 units year to date. The Current Year (CY) data dives us some idea where we could be heading. We has seen 476,000 units sold CY during 1992 and 478,000 CY units during 1983. We have momentum. The Current year level is higher than the rolling year level which means that the sales numbers are expanding. It appears that we could exceed 600,000 units, possibly 608,000 units (1992) and potentially more than 622,000 units (1983.) The authors of the report are saying that we are selling at an annual pace of 667,000. Last year we sold 545,000 units. Maybe by this time next year we might be on track for 667,000. Not by the end of this year. An argument might be able to be made for 650,00 by the end of the year. We need to see consistent levels above the 1983 and 1992 paces. Next year we may need to monitor the 1988 rate more closely. Are we living in 1983 or 1992? September of 1995 we had a level of  520,000 CY sales during September to End at 665,000 that year. We have 46,000 fewer sales year to date. That means 619,000 is within reach this year. We have sold 474,000 units through this September compare to 436 last September (8.7% higher.) If this pace is maintained we could hit 610,000. The annual rate of sales of 667,00 units seems to be pie in the sky.

If you build it they will buy. The current inventory is at 284,000 units. If we sell 50,000 units a month then we have roughly 5.6 months of inventory. This is a lower inventory level than we had during August 2001 (310,000) We also have a lower level of inventory than September of 1983. Will more under construction units see completions to maintain the supply demand situation? Time will tell.

New Home Construction and GDP. Gross Private Domestic Investment includes some level of new construction data. Third quarter of last year we had 5.2B of new homes sold. This quarter we tentatively have sold 5.5 billion dollars worth of new residential homes.

Too much winning. The stock market fell after this good news was released. There is a fear that the Federal Reserve will increase the interest rates on 30 year mortgages (by increasing the rate they charge banks.) The average 30-year fixed rate mortgage inched up to 3.87%. I was a Realtor when the 30-year fixed was 8.37%, 7.83%, and 7.38%. Those were good years. I stopped selling during 2005. Do we have 22 years or 13 years to return to the pre-recession peak for new home sales? Do we have three to five years until we return to pre-recession existing home sales? If we increase 1% a year to the thirty year fixed rate we could increase the rate by 0.25% a quarter for three years and we would still be under the 7% level. If the interest rates increase then the average sales prices may slow their rapid increases. If the interest rates increase banks may want to lend money for mortgages again. We have a long way to go before the stock market has to "flake out" over better than expected new home sales data.

It's the economy.