In April 2015, the housing market was in an interesting set of contrasting conditions. The sales of existing homes fell by 3.3% while the sales of new homes rose by 6.8%. Existing home sales were suffering from a basic supply problem, as the inventory of unsold existing homes was at a 5.3-month supply (6 months is considered the mark of a healthy housing market). New homes were also in a low inventory position at a 4.8-month supply, and while new homes were being built at an increasing rate, collective demand was outstripping supply.
By September, the situation had reversed somewhat. Purchases of new homes dropped sharply and sales of existing homes were on a considerable upswing. New home sales fell by 11.5%, compared to a downward revision of the August sales numbers. The seasonally adjusted annual rate fell to 468,000, representing a sharp decline from a heated market earlier in the year but an increase of 2% over the previous year. Existing home sales increased by 4.7% to a 5.55 million seasonally adjusted annual rate — a bit short of July’s post-recession peak number.
The supply is still low, with the existing home supply coming in at 4.8 months inventory and the new home supply reaching the 5.8-month inventory mark. Low inventory in the existing home market presents a bigger problem because of the relative size of the two markets.
That low inventory presents a significant problem, because lower collective inventory means rising prices and therefore greater difficulties for first-time homebuyers. Since wages are relatively stagnant, rising prices makes it even more difficult for new homebuyers to save up the necessary down payment money for a purchase. While income growth of 2% over the past year is barely beating inflation, the median home price in September rose 6.1% over that same period to $221,900.
As a result, the percentage of homebuyers purchasing their first home in September sank to 29%. First-time homebuyers are important to establishing momentum in the housing market for two reasons: they bring new demand into the housing system therefore raising the overall total; and they represent a critical cog for current homeowners who want to upgrade. Many homeowners cannot afford to upgrade without selling their existing home in the process.
This news is not quite as doom-and-gloom as it may sound. Keep in mind that housing figures are notoriously volatile and subject to revision. Consider that according to The Wall Street Journal, the 11.5% drop in new home sales has a margin of error of plus/minus 11.3 percentage points. Both existing and new home sales represent reversals from unexpected values in the previous month (unusually low for existing home sales and high for new home sales).
The overall trend in 2015 has been overwhelmingly positive compared to 2014. Without taking seasonal adjustment into account, new home sales are up 17.6% from the same period in 2014. Housing is a relative bright spot within this year’s GDP figures.
At this point, the markets are looking at this reversal as an anomaly. Stephen Stanley of Amherst Pierpont Securities deems it, “most likely statistical noise,” but also suggests that it could reflect the September market struggles.
The greatest takeaway may be that analyzing any single month’s housing reports is basically futile — at least it is given the current levels of volatility. It is best to keep an eye on longer-term trends instead of trying to extrapolate from single data points. Let the professional pundits wrestle with that task.