As anticipated, the market for new single-family houses rebounded from a steep 2018 fourth quarter slide to post modest gains in the 2019 first quarter against fairly strong 2018 first quarter levels. The primary driver of the housing rebound has been the decline in mortgage rates from the recent peak of 4.94% during the first week of November to 4.10% during the week of May 6, according to Freddie Mac. With unemployment low and consumer confidence high, many potential buyers do not want to lose the opportunity of homeownership (or trading up to a larger home). If economic conditions remain positive, the new homes market should see at least modest gains in 2019, especially as year-over-year comparisons become more favorable as the year progresses.
Developments in the housing market have been somewhat difficult to follow (or interpret) thanks to the combination rising mortgage rates and the delays in accumulating and processing the national data as a result of the shutdown of the Federal government at the end of 2018. More of the housing data has been subject to revision, or so it seems, and some of the data that has been published initially has not seemed quite right. Nevertheless, as the Commerce Dept. has caught up on its data release schedule, a picture of housing market trends has emerged that appears to make sense and to be consistent with broader economic trends.
Housing Starts. Last week, the Commerce Dept. estimated that single-family housing starts for April were at a seasonally-adjusted annualized rate (SAAR) of 854,000 units, up 6.2% from a slightly upwardly-revised March estimate, but down 4.3% from the April 2018 estimates.
Monthly SAAR single-family housing starts estimates fell sharply in November and December of last year, but then rebounded sharply (to a post-financial crisis high) in January, fell back in February and have been working back toward a “normalized” level since then. The April estimate puts the market back within 3%-4% of the production levels recorded before the mortgage rate-induced housing slide in 2018.
On the surface, that rebound does not seem all that impressive. The average mortgage rate for the 2019 first quarter was 4.37%. compared with 4.28% in the comparable quarter last year. Back then, rates were rising. This year, they have been falling. Mortgage rates are now about 50 basis points lower than they were a year ago. We have seen improvement, but starts are still behind where they were a year ago. Meanwhile, the starts and permits chart (shown above) suggests perhaps that the single-family market is still rolling over, despite the April rebound in starts.
But starts are only one part of the picture. To get the whole picture, we also have to look at single-family houses under construction and houses completed that are still available for sale (i.e. specs). The data show that the sum of the two (on a SAAR basis) rose steadily for most of the past two years, even as new home sales were sliding throughout 2018.
The sharp pullback in starts in the beginning of the year suggests that builders had more than enough inventory going into the spring selling season and so decided that they did not need to start more homes. This probably drove the weaker housing start numbers for February and March.
Although that may be a sign of caution, May’s three point jump in the NAHB/Wells Fargo Housing Market Index, a measure of homebuilder sentiment, suggests that the outlook for sales has brightened a bit, even as the spring selling season has been winding down.
The biggest question mark raised in the April new residential construction report came from single-family permits, which were clocked at a SAAR of 782,000, down 4.2% from the March reading and down 9.4% from the April 2018 estimate. April permits were lower than the levels estimated for the 2018 fourth quarter and also the lowest level of single-family permits since October 2016. If indeed builders are more optimistic about future sales, I would have expected a higher figure, especially since permits authorized but not started (i.e. builder inventories of active permits) are roughly equal to the year-ago level. Like all housing statistics, however, it is important to remember that the data are subject to revision and that builders could pull more permits in the months ahead.
Assuming that permits data is a blip and that economic activity will not change appreciably from current levels, I expect that new home sales will exceed 700,000 units in 2019. Prior year comparisons will get easier as the year progresses.
Homeownership. The Commerce Dept. reported that the homeownership rate for the 2019 first quarter was 64.2%. That was down from 6.8% in the 2018 fourth quarter, but even with the estimate for the 2018 first quarter. That tied the 2016 second quarter for the biggest quarterly drop in modern history.
The Commerce Dept did revise the 2018 first quarter calculation (which resulted in no change in the homeownership rate of 62.2% originally reported for that quarter. The sharp drop in the 2019 first quarter homeownership rate stems, I believe, from a miscalculation of the 2018 fourth quarter rate.
The Commerce Dept.’s detailed quarterly estimates of the U.S. housing inventory imply that total occupied housing units in the 2018 fourth quarter increased by 1.12 million, with owner-occupied housing increasing by 1.27 million units and renter-occupied housing declining by 0.15 million units. The increase in occupied housing was achieved through a reduction of 0.84 million units in vacant houses and an increase of 0.28 million units in the total housing stock.
These results would have been considered quite strong for any year (since the financial crisis), let alone for a single quarter. That they were achieved during the worst quarter of the year for new home sales (and after the pace of new home sales had been decelerating steadily in the preceding months) is remarkable. 2018 fourth quarter new home sales were the worst since 2011, at the tail end of the financial crisis and housing bust.
Consequently, I believe that the increase in owner-occupied housing units for the 2018 fourth quarter is wrong and that it will be revised downward when the Commerce Dept reports the homeownership rate for the 2019 fourth quarter.
2019 First Quarter Net New Orders for the Homebuilders. The nine of eleven publicly-traded homebuilders that I track that have reported results so far have posted an average decline in net new orders of 1%, modestly worse than the 3% gain in non-seasonally-adjusted new home sales reported by the Commerce Dept. for the first quarter. The results ranged from a 6.0% decline for PulteGroup (PHM) to a 7.3% gain for Meritage Homes (MTH).
Despite the small year-over-year decline, builders were upbeat about the quarter and the outlook for future sales. Some of that optimism undoubtedly reflected a sense of relief that orders had bounced back from an average 9.7% fourth quarter decline. All of the builders said that sales were weakest in the first month of the quarter and got stronger as the quarter progressed. Some said that the pace of gains continued to rise in the weeks subsequent to quarter end.
2019 New Home Sales Outlook. Based upon first quarter orders, which as noted were off only slightly from a fairly strong 2018 first quarter, and also on the anecdotal evidence of continuing gains in orders in the early weeks of the second quarter, it seems likely that, barring a sudden setback in the economy, 2019 new home sales will exceed the 2018 total, which was the highest level of sales recorded since 2007.
Based upon recent trends, new home sales could top 700,000 units in 2019, with modest continued improvement over the next several months. While second quarter orders should surpass prior year levels on the strength of recent gains, orders for the second half of 2019 should exceed prior year levels that weakened throughout the course of 2018.
The strength of 2019 second half sales will depend upon several factors, including the strength of the economy and, now that mortgage rates are back to 2017 levels, whether the improvement in affordability from those low rates will be offset by a reacceleration in home prices.
Outsized gains in home prices, well in excess of inflation rates, were a strong contributor to the slowdown in the new home sales in 2018. (The weakness in housing was not all about the Fed raising rates.)
If builders and other sellers of houses can show restraint in raising house prices and if the economy is able to shake off recent headwinds from trade wars, housing could show solid gains in 2019 that could continue into 2020.
May 19, 2019
Stephen P. Percoco
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