Happy day. After falling for three consecutive months, new home sales topped estimates for July, data out Tuesday showed.
Sales rose 1% last month to a 708,000 annual pace (figure below).
That was better than the 697,000 rate economists expected. The range was 645,500 to 755,000.
June was revised higher, to a 701,000 clip from 676,000. Obviously, we’re now running up against impossible comps. This time last year, new home sales were running at a 972,000 pace, as pandemic dynamics catalyzed a flight to the suburbs, turbocharged by record-low mortgage rates courtesy of the Fed.
The new residential sales data came a day after existing home sales posted a second straight monthly gain, according to the NAR.
After slipping during the prior month, prices for new homes resumed their ascent. The average selling price was $446,000 (figure below), up 65% from a decade ago.
The median price in July was $390,500, up more than 18% YoY.
Forgive me, but that has to result in demand destruction at some point. I realize this often comes as a shock to many readers because (thankfully), the majority of you are economically stable, but most people in America don’t have much money.
The (pervasive) story about “excess savings” is nonsense on any rational interpretation of the word “excess.” The idea that the average person can afford a half-million dollar home is ludicrous. Let’s be generous and say the median annual family income is $80,000. That’s for a family. I’ll admit to being an outlier and thus to harboring unrealistic expectations for what people “should” be saving if they want to be truly secure, but if you’re trying to split $80,000 four ways (assuming two children) you shouldn’t be pondering buying a half-million dollar home. Or maybe it’s more appropriate to shift the blame away from the family, so let me rephrase: You shouldn’t have to ponder the prospect of buying a half-million dollar home.
Is it doable, where “doable” means you can find a bank that might help you finagle your way into it? Well, sure. Probably. 2007 told us that strippers can own three properties, after all. And I’m sure you can find plenty of “experts” on housing and mortgage lending who will tell you my assessment is, at best, overwrought and at worst suggests I don’t understand the dynamics, likely because I’m not a “traditional” buyer.
But is there no point at which common sense matters? A couple of weeks back, an acquaintance from graduate school sent me a link to a listing for a single-level home on a (very) small lot in some Appalachian backwater with a population of ~40,000 people. The price tag: $287,000. (Her point was that when we were in grad school together something like that would have probably gone for $65,000 in a sellers’ market.)
My (mostly anecdotal) assessment is that the above isn’t sustainable on an economy-wide basis. Prices have to come down or demand will crater. One way or another, people won’t pay a quarter of a million dollars for a shack with a carport in the middle of nowhere. Either they’ll recognize that as a ridiculous proposition or if they don’t, they won’t be able to afford it. It remains my steadfast contention that buying a highly-levered asset at record-high prices when said price increase is quite obviously the result of unsustainable dynamics is an objectively poor decision.
In any case, new home sales are on pace for 879,000 in 2021, up from 2020’s total. Inventory rose in July, as did months’ supply, which hit 6.2 (figure below).
That’s the highest since the pandemic started to hopelessly distort the data and at least suggests the imbalances which helped drive up prices are starting to resolve.
Bloomberg had the boilerplate, benign take. “Looking ahead, any easing of builders’ trials to acquire materials and workers should support the construction of a greater number of affordable homes, generating more sales,” a Tuesday article read.
That assessment seems to assume current prices can be properly described as “affordable.” What I wonder is whether would-be buyers are starting to consider the possibility that setting money on fire paying rent for no equity isn’t much different in the short-term than putting 20% down on an asset that promptly plunges 20%. Of course, people do the latter every time they buy a new car.
What likely will happen is prices will correct slightly perhaps and then appreciate at below average rates or not at all, the exception being areas that attract a lot of folks due to a good economy. It is always a flag when prices in real estate move with high correlation. When the moves are not highly correlated there should be no problem (up or down) as residential real estate most of the time is a local market. One way of looking at it is to realize that appreciation needs to be at about the rate of a 30 year mortgage for a buyer to make out well over a reasonable holding period- say 10 years. Right now that means ~3% which is not really that heavy a lift. One should keep in mind that because of the financial crisis there was a period of about 12 years (08-20) where not enough single family houses were built to satisfy population growth and depreciation of the housing stock. And there was stranded investment in certain areas (want a new house in Detroit?). Also the demographics right now are favorable for buying of single family homes.
When I see a story like this I reflect on the appreciation of a home I purchased in suburban NY that has barely appreciated at 3% per year since 2005. Prices here ramped up 25% in a year to get to that level. It may seem like a bubble but it was 15 years in the making. Ten years from now housing in the US is very likely to be nominally higher than it is now.
Yeah, I mean I really like your rationale for housing (I always read your housing comments) because it makes sense for people with money, for people with good economic prospects and for existing property owners. But it doesn’t solve the problem for a new family trying to buy their first home. None of these (wholly rational) arguments matters when, say, a 28-year-old couple goes to buy their first home and they need $100,000 for a downpayment. The percentage of young adults (and here I mean late-twentysomethings, not 18- or 19-year-olds who probably aren’t house shopping) in America with $100,000 in unencumbered cash has to be minuscule. It would be extraordinarily difficult for a young couple cohabitating while finishing college to save that kind of money between them in a short period of time, even if they somehow both had full-time, good-paying jobs. I just don’t see how the math works out.
Oh, this is absolutely happening. Just had to major in STEM.
My husband and I are both college educated, we have kids. We were renters until 2019 when we finally purchased a home at the age 38…
You mean you don’t find all my comments worth reading :)? To your point, I cited 2005 as a starting point for my purchase and that was where housing was also starting to go to the moon. Affordability was low. My guess is that after this year affordability will gradually get better- meaning incomes will begin to outpace house price appreciation. The housing articles I have seen suggest that home purchases peak for folks around 33 years of age. Twenty somethings usually don’t buy then- for a number of reasons. There are low down payment options such as VA, FHA, State housing agencies and private mortgage insurance though. Public policy needs to broadly address the safety net, including affordability of higher education to help younger folks starting out. As we know, high debt saddling recent college graduates is a problem. But that problem is both a societal problem and also one of individual choice. If you know you are going into a field that is modestly paying or you need to go to grad school, as a youngster or as a parent – this type of discussion needs to happen before selecting a college. If your parents are not capable, colleges should discuss these issues with students as well.
Maybe the next step in home price increase is to have Cathie Wood start up a fund (under symbol AMOON ) in which she brings in $250B from investors and use the proceeds to continually purchase homes coming onto the market. She could then leverage the whole caboodle by mortgaging those purchases (essentially have the Feds back her play) , and raise her leverage to $1T. Then, just to make sure there is a continuing demand problem, she could not sell nor rent the properties — thus reducing the housing stock. Soft Bank could back the play. I am just kidding. Sort of.
What those couples are pondering is whether they can afford zero, one or two kids.
By the time one factors in interest, real estate taxes, homeowners insurance, HOA/maintenance and repairs, one might be better off (economically) renting in certain areas of the country. Real estate taxes are getting out of control in many areas.
When people calculate the appreciation on their home, they conveniently ignore such annual costs.
People need to live somewhere. The rental market is also on fire. I have a friend who is now a renter after selling her starter home (a disastrous story that’s too long and off topic). She placed “bids” on several apartments with landlords getting multiple offers and calling for highest and best like it’s a house sale.
She is now paying more to rent an apartment than she was paying on her mortgage and for a smaller place…
When I got out of grad school in 1970 my wife and I were able to buy a brand new, nifty 1400 sqft 3 BR home for 30K (mort at `9%) but doable. Our second house in 1972 was also new with a half acre of irrigated turf, very nice, also 30K. In those days one could be expected to be limited to a mortgage equaling < 3x annual income. So 400k under those terms would require income of 135K. Even with 10% down, you’ld have to be earning 120k. And the payments. For a 30 year, 360k mortgage at 3% you have a payment of $1500/ month plus taxes and insurance, probably 500/mon at least. This stuff is not for the faint of heart — and also the cause of 2008. A family with $80k in income (maybe 55k net, or 4500/mo) would be coughing up nearly half their monthly take on housing. Can’t really do kids with that toll.
My daughter just purchased a house for $410K. As far as i know she did not have much cash and her earnings are no more than 80K. I dont know how she funded the deposit but I expect the finance company worked with her. It feels like 2008 all over again. I would not be surprised if she defaults on her mortgage at some point or comes back to papa to help out. She may be lucky in that I can help her but i bet there are thousands without such help.
You think $400,00 is bad? In Canada the question is: Can regular people afford $800,000 homes?
And in Sydney, it has reached 7-figures.
I think this post raises two interesting questions. The first is whether the fed believes that it should be buying these $400k homes. To the degree that it keeps rates low and performs bailouts, it has telegraphed that answer (ie a fed put). If the fed is a buyer, who is some ‘average couple’ to disagree (the main street parallel to dont fight the fed)? Of course these ‘average couples’ don’t buy the home, their bank does before reselling said loan, probably to a GSE — who in turn assumes that it is too big to fail and can flip said loan to the fed. We all know that this jig can go on as long as rates remain low (ie the fed determines that the $400k house is ‘a buy’). At what ‘average home price’ will even the fed suffer sticker shock? Hard to say, since there are few short term costs to their conjuring up a couple extra zeros in their accounts. The second question is to what degree these $400k homes are better than ‘bridges to nowhere’? Is clumsy monetary stimulus better than even the most wrongheaded fiscal stimulus? If we are going to have a massive debt overhang in a few years, we should work on an answer. Monetary stimulus creates zero-sum asset bubbles, which are inherently unproductive and increase wealth transfer from -nots to haves, but it does create construction jobs, realtor commissions, and allows those new homebuying couples to get that ‘new car smell’ they’ve been dreaming of. If they end up lessees, plunking down 3% for a ‘3year/36’ home upgrade, this is regrettable but not unforeseen, recalling the JP Morgan quote about assets returning to their rightful owners. FWIW I close on the sale of my house in a few days, which I will be selling for 30% more than I paid just two years ago.
Shortage of single family houses. Investment fleet buyers. mREITs funding flippers. Wall Street funding iBuyers (iFlippers). Incredibly low rates. Inflation. Demographics. Rising rents. Pandemic savings. WFH. So many factors supporting house prices.
To justify a bet against house prices, need to foresee how those factors will reverse or be supplanted by opposing factors.
Unlike commodities and securities, you can’t directly short house prices. So long speculators can easily drive house prices up but short speculators have a harder time driving prices down.
Are house prices unaffordable? “To who” is the question. Prices are set at the margin. Suppose the marginal buyer is a rental fleet buyer or a fintech flipper?
I have looked at INVH many times and keep finding reasons not to buy it. This has consistently been the wrong decision. Here I am probably guilty of letting personal beliefs influence investing decisions.
If governments wanted to help ordinary people be homeowners, there are many ways to do it. Homestead property tax exemption, capital gains surcharge, tax surcharge for large rental fleets, etc.
However, the left-wing progressive groups are caught up in anti-property owner and pro-high density ideologies. The ordinary homeowning family is losing its political allies.
Houses are also the only asset (available to ordinary people) that can be bought with incredible goverment-supported leverage (5-20X levered non-recourse), government subsidy (mortgage interest deduction, capital gain exemption, property tax deduction), combines current value (shelter or income) with future value (appreciation), has innate inflation hedge characteristics (land value, property tax limits), supports margin (HELOC etc), is partially shielded from creditors (homestead exemption), and I’m sure I’m overlooking some other attributes.
Doesn’t mean one can’t lose one’s shirt, of course, but the deck is stacked in the homeowner’s favor.
I bought an $0.79M house in 2006 with 5% down, was well underwater by 2010, today it is worth around $1.2M. This is, in the context of real estate investment, an embarassingly terrible performance – less than 3% annual appreciation – but since the net aftertax cost of ownership was equivalent to the cost of renting a like house, the $0.41M gain is effectively free and represents a 1,000% return on the original “investment” (the down payment).
From a standard investment viewpoint, I made a terrible decision. If it were a stock, it would be among the biggest screw-ups of my life (considering capital deployed, percentage return, and time value of money foregone). It’s not a story I’m proud to tell. But the structurally stacked deck of advantages that (still) surrounds home ownership in the US meant that even this absymally stupid, ill-timed, over-priced decision got bailed out over time.
Not to forget the quality of new homes under $600k. In 10 years they will show the effects of poor quality construction and materials. For proof look at houses built in the last 10 to 20 years.
Yup. I can’t understand buying a misshapen pile of Hardieboard, OSB, T-11, vinyl, and other materials with a field life of a only few decades, when there are comely alternatives built by hand from real cleargrained wood, plaster, brick and other materials with multi-generational service lives.
If only the culture would give up the 1950’s SFH energy/polluting//time-wasting maintenance dreams and look at property as an income-generating asset and not a gambling chip, then a lot of these problems would be solved.
Anybody heard of WikiHouse, smarthomes, changing zoning laws, and a little effort to get with the 21st century?
Giving up the concrete mouse maze, embracing the power of the internet and developing contract based income generating small farming worked for me.
Instant grat home ownership is for people who want to be controlled.