All my favorite new home sales topics covered in one article!

Wolfe Jackson, CFO

Giving credit where due – Bill McBride and CalculatedRisk.com are one of my favorites.

He has just written an article (see below) that hits most of my favorite topics about new home sales in one article!

  • 2014 new home sales: Up over the past couple of years, but still really low when viewed historically. (2014 was just under half of 2000.)
  • 2014 new home sales: Disappointing/below expectations – but just means more growth in the near future.
  • Demographics – “a slow moving but unstoppable force” are favorable for new homes into the foreseeable future.
  • The “distressing gap” – New home sales are not making up the % of the total housing market that they historically have for years. (Distressed sales took new homes’ place for the last few years.)

All this points to future growth in new home sales for years to come. Enjoy the article!
TUESDAY, JANUARY 27, 2015

Comments on New Home Sales

by Bill McBride on 1/27/2015 12:10:00 PM

The new home sales for December were at 481 thousand on a seasonally adjusted annual rate basis (SAAR).   This was the highest level of sales in over 6 years (best December since 2007).

However sales in 2014 were only up 1.2% from 2013 (1.4% rounded in table below).  Here is a table of new home sales since 2000 and the change from the previous year:

New Home Sales (000s)
Year Sales Change
2000 877 -0.3%
2001 908 3.5%
2002 973 7.2%
2003 1,086 11.6%
2004 1,203 10.8%
2005 1,283 6.7%
2006 1,051 -18.1%
2007 776 -26.2%
2008 485 -37.5%
2009 375 -22.7%
2010 323 -13.9%
2011 306 -5.3%
2012 368 20.3%
2013 429 16.6%
2014 435 1.4%

There are two ways to look at 2014: 1) sales were below expectations, or 2) this just means more growth over the next several years!  Both are correct, and what matters now is the present (sales are picking up), and the future (still bright).

Based on the low level of sales, more lots coming available, changing builder designs and demographics, I expect sales to increase over the next several years.

As I noted last month, it is important to remember that demographics is a slow moving – but unstoppable – force!

It was over four years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive.  One major reason for that optimism was demographics – a large cohort was moving into the renting age group.

Now demographics are slowly becoming more favorable for home buying.

graph 1graph 1graph 1   Click on the graph for larger image. 

This graph shows the longer term trend for several key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).

This graph is from 1990 to 2060 (all data from BLS: 1990 to 2013 is actual, 2014 to 2060 is projected).

We can see the surge in the 20 to 29 age group (red).  Once this group exceeded the peak in earlier periods, there was an increase in apartment construction.  This age group will peak in 2018 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak in 2023.  This suggests demand for apartments will soften starting around 2020 +/-.

For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior).  The population in this age group is increasing, and will increase significantly over the next 10+ years.

This demographics is positive for home buying, and this is a key reason I expect single family housing starts – and new home sales – to continue to increase in coming years.

graph 2  Click on the graph for larger image. 

This graph shows new home sales for 2013 and 2014 by month (Seasonally Adjusted Annual Rate).

It it important not to be influenced too much by one month of data, but if sales averaged the December rate in 2015 – just moved sideways – then sales for 2015 would be up 10.6%.

There are several reasons to expect a return to double digit (or close) new home sales growth in 2015: Builders bringing lower priced homes on the market, more finished lots available, looser credit and demographics (as discussed above).  The housing recovery is ongoing.

And here is another update to the “distressing gap” graph that I first started posting several years ago to show the emerging gap caused by distressed sales. Now I’m looking for the gap to close over the next few years.

graph 3  Click on the graph for larger image.

The “distressing gap” graph shows existing home sales (left axis) and new home sales (right axis) through December 2014. This graph starts in 1994, but the relationship has been fairly steady back to the ’60s.

Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales.

I expect existing home sales to mostly move sideways (distressed sales will continue to decline and be offset by more conventional / equity sales).  And I expect this gap to slowly close, mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.
Read more at http://www.calculatedriskblog.com/2015/01/comments-on-new-home-sales.html#A9QJjEX6OveUSoF4.99