Does January's New Home Sales Drop Hint At Housing Downfall?

Sales of new U.S. single-family homes dropped for the second straight month in January and in four of the past six months. Does this give smoke signals of a downtrend in the housing market?

Exchange-traded funds or ETFs that track the homebuilding industry dropped on Monday, after the news release. iShares U.S. Home Construction ETF (WA:ITB) fell 0.7% while the SPDR S&P Homebuilders (NYSE:XHB) ETF XHB dropped 1%. Meanwhile, the PowerShares Dynamic Building & Construction Portfolio PKB was down 1.3%.

Shares of major builders of the U.S. housing industry like D.R. Horton Inc. (NYSE:DHI) Beazer Homes USA Inc. (NYSE:BZH) , Lennar Corp. (NYSE:LEN) and PulteGroup Inc. (NYSE:PHM) slipped following the news release on that day.

Is Weather or Higher Mortgage Rates the Culprit?

Sales of newly constructed homes, accounting of roughly 10% of all U.S. home sales, fell 7.8% in January from the prior month and 1% from the year-ago period to a seasonally adjusted annual rate of 593,000 units, as per data released on Feb 26 by the Commerce Department.

Notably, last month’s figure is the lowest since August 2017, weighed down by sharp declines in the Northeast and South. Sales sank 33.3% in the Northeast and fell 14.2% in the South, which accounts for the majority of new home sales. Sales rose 1% in the West and 15.4% in the Midwest.

The downside was probably due to cold weather, particularly in Southern states, rather than any economic factor. Otherwise, all regions would have experienced deterioration.

Again, higher mortgage rates could also be the reason for this downfall. Mortgage rates are surging in proportion with U.S. government bond yields in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve. The 30-year fixed-rate mortgage rose to an average interest rate of 4.15% for the week ending Jan 25, 2018, the highest level since March 2017, according to mortgage finance agency Freddie Mac.

Again, the 30-year fixed mortgage rate rose to an average of 4.40% for the week ending Feb 22, the highest level since April 2014, from 4.38% in the prior week. It has increased for seven straight weeks. Higher mortgage rates accompanied with the loss of homeowner tax breaks in certain expensive markets might be hitting on affordability.

Apart from the recent weak new home sales report, last week’s report from the National Association of Realtors also showed dismal existing home sales. Existing home sales dropped 3.2% to a seasonally adjusted annual rate of 5.38 million units last month. Existing home sales, which account for about 90% of U.S. home sales, tanked 4.8% on a year-on-year basis in January.

Meanwhile, the industry has already been challenged by shortage of homes for sale, suitable land and skilled labor. Total housing inventory at the end of January rose 4.1% to 1.52 million existing homes available for sale, but is still 9.5% lower than a year ago and has fallen year over year for 32 consecutive months. That said, the inventory of new homes was up 15% from a year ago in January, which is expected to provide some relief as we head toward the spring selling season.

Limited land availability is driving prices higher, as median sales price of a new home jumped 2.4% year over year last month. The median house price increased 5.8% for existing homes from a year ago and was the 71st consecutive month of year-on-year price gain.

Adding to the woes, first-time buyers comprised 29% of sales in January, which is down from 32% in December 2017 and 33% a year ago.

Will the Current Downfall Linger Through 2018?

Apart from concerns over chances of a series of interest rate hikes by the Federal Reserve, homebuilders continue to struggle with growing labor shortage, limited land availability, higher material costs and a constrained mortgage environment. These are restricting homebuilders to respond to growing demand.

Nonetheless, homebuilders remain confident about the upcoming period. In spite of shortage in inventory, robust demand from a solid job market is keeping the industry alive. Americans filing for unemployment benefits plunged to a 45-year low for the week ending Feb 17, 2018, indicating strong job growth. Job additions grew at a solid pace in January, and the record low unemployment rate and strong wage growth show that the labor market is in good shape. Notably, wage growth hit the fastest pace in January in more than eight-and-a-half years. Although home price increases have surpassed wage growth, which remained 2.9%, the optimism surrounding the U.S. housing market remains intact amid overall economic growth. Along with this, a better employment picture generally boosts housing activity and demand.

Given this mixed scenario, we should keep an eye on how the housing sector responds to rising rates as we approach in Spring, which according to Fitch Ratings, is traditionally more upbeat than the rest of the year.

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PulteGroup, Inc. (PHM): Free Stock Analysis Report

Lennar Corporation (LEN): Free Stock Analysis Report

D.R. Horton, Inc. (DHI): Free Stock Analysis Report

Beazer Homes USA, Inc. (BZH): Free Stock Analysis Report

SPDR-SP HOMEBLD (XHB): ETF Research Reports

ISHARS-US HO CO (ITB): ETF Research Reports

PWRSH-DYN BLDG (PKB): ETF Research Reports

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