Courtesy of Doug Short.
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Evidence continues to mount that all is not well for the new home sales market in the United States. Now that we’re armed with the most recent data available for median new home sale prices and median household income through the month of July 2014, let’s update the picture of where things stand for the consumers of new homes being built throughout the United States:
We observe a scenario in today’s new housing market that very much echoes the early phases of the topping out of the first U.S. housing bubble after September 2005. Here, after a very robust period of growth during the major inflation phase of the first bubble, where the median sale prices of new homes in the U.S. were rising on average by $21 for every $1 increase in median household income, the rate at which new home sale prices were escalating began to slow significantly before flattening out through November 2007, then crashing as the U.S. economy began to contract in a major recession.
Today, we see that the major inflation phase for the second U.S. housing bubble ran from July 2012 through July 2013, as median new home sale prices rose by $25 for every $1 that median household income increased during that period. Since then, that pace of growth would appear to be decelerating and, since January 2014, to increasingly be flattening out.
We’re also increasingly seeing the situation where new home builders are boosting the incentives offered to new home buyers without boosting prices, which once again reflects what happened during the topping out or stagnation phase of the first U.S. housing bubble. Calculated Risk presents Tom Lawler’s notes from new home builder D.R. Horton’s (NYSE: DHI) July conference call with investors:
In the company’s conference call Horton’s CEO characterized the overall demand for new homes last quarter as “relatively stable” compared to a year ago, but that Horton’s previous aggressive acquisition of land/lots, combined with more aggressive use of sales incentives to move inventory, enabled the company to boost its market share to its highest level ever. Another official said that the company increased sales incentives in MANY of its communities in order to meet its aggressive sales goals. The official noted that sales incentives were much lower than normal in 2013 and early 2014, but that last quarter (and currently) sales incentives were “back to normal.” Another official noted that home price appreciation had slowed appreciably.
That trend continued into August, particularly in areas that had previously been booming during the inflation phase of the second U.S. housing bubble, such as Phoenix, Arizona:
New-home prices across metro Phoenix soared too high and too fast in 2012 and 2013 for many buyers to handle, leading to a slump in sales that has builders worried.
Higher prices for new houses, along with slower-than-expected increases in household income, population and job growth, will cut the number of home sales an estimated 5 percent from last year’s level, stalling the long-awaited recovery of the region’s homebuilding market.
The slowdown in home sales means fewer construction jobs but better deals for new-home buyers. Home prices have dropped slightly this summer, and builders are trying to lure buyers by offering incentives that include lower mortgage rates and free upgrades on appliances, countertops, lighting and flooring.
That opens up a question of how new home builders are doing, which we’ll tackle in the very near future.
References
Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 3 September 2014. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. “current U.S. dollars”) for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]
U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 5 September 2014.
Previously on Political Calculations
We were among the first to declare that a second housing bubble was forming in the U.S. economy, and we were the first to back it up with an objective framework of analysis and data. Our ongoing analysis is chronicled below….
- The U.S. Housing Bubble Is Back – we apply our groundbreaking analytical methods to determine that a new housing bubble has begun to inflate in the U.S. economy.
- Fuel, Oxidizer and a Spark – Part 1 – we revisit the origins of the first U.S. housing bubble and identify the factors that ignited it.
- Fuel, Oxidizer and a Spark – Part 2 – we explain why housing prices rose so much more in just four states than they did elsewhere, and point our finger at the Fed’s below-market interest rate policy as the primary source of fuel for the bubble.
- Fuel, Oxidizer and a Spark – Part 3 – we examine the factors that kept the first U.S. housing bubble going, even after the Fed finally acted to stop throwing so much fuel on the fire.
- Confirming the Second U.S. Housing Bubble – using revised data, we confirm that there is no apparent new-year slowdown in the inflation phase of the new U.S. housing bubble.
- As the Housing Bubble Inflates: Month 9 – we use hard data to refute the housing bubble deniers!
- As the Housing Bubble Inflates: Month 10 – we note the fourth consecutive record for median new home sale prices and discuss the spark that set off the second U.S. housing bubble.
- Setting the Baseline for a Better Housing Affordability Index – how affordable is your home when compared with every other American homeowner? We create a new index to answer that question for any household income level.
- As the Second U.S. Housing Bubble Inflates: Rapidly Escalating Prices – each revision of median new home sale prices indicates the second U.S. housing bubble is growing even faster than the first!
- The Sales Mix of the New Housing Bubble – we find that just like in the first U.S. housing bubble, the sales mix of new homes in the second U.S. housing bubble is being distorted in a very similar way.
- The First Anniversary of the Second U.S. Housing Bubble – we mark the first birthday of the second U.S. housing bubble.
- Is the Second U.S. Housing Bubble Beginning to Peak? – We note a deceleration in the upward trajectory of median new home sale prices and identify the primary cause. Along the way, we find that bubbles can only exist if the Fed wants them to exist!
- U.S. New Home Sale Prices Stalling Out
- Breathing New Life Into the Second U.S. Housing Bubble – After stalling out through September 2013, we find that U.S. housing prices began to rise again with lower mortgage rates following the Fed’s decision to delay tapering its purchases of U.S. Treasuries and Mortgage-Backed Securities in September 2013.
- Slowing Inflation for the Second U.S. Housing Bubble – looking at the data through December 2013, we find that while the second housing bubble has resumed inflating, it would also seem to be inflating at a decelerating rate.
- U.S. New Home Sale Prices at the Mercy of Mortgage Rates – we note the increased sensitivity of the growth rate of new home sale prices with respect to mortgage interest rates.
- Revisualizing the Second U.S. Housing Bubble – we often get requests to present our charts showing the relationship between median new home sale prices and median household income using inflation-adjusted data, so we did. From our perspective, there is no real value in presenting our data this way because we’re tracking new home sale prices against median household income, so both axes on our chart are being adjusted for inflation. Adjusting data to account for the effects of inflation is really only worthwhile if you’re tracking data against time.
- Real Estate Prices Begin to Contract – we note the appearance of the first month-over-month decline in the trailing twelve month average of median new home sale prices since the second U.S. housing bubble began to inflate.
- U.S. Real Estate’s State of Malaise – media reports begin to catch up to our assessment that all is not well with the state of the U.S. housing market.
- What’s Driving the U.S. Housing Market? – we point to the role of the skewed sales mix of new homes to explain why prices are rising at the same time the number of sales fell sharply in March 2014. A lot of so-called “housing analysts” would not appear to be aware that such a distorted sales mix is a characteristic of a bubble being present in a real estate market, but then, they’re also not very aware of any kind of relationship between household income and new home sale prices.
- New Home Sale Prices Fall for Second Time in 2014 – For the second time, new home sale prices dipped in preliminary month-over-month data.
- London’s Bipolar Housing Market – we extend our analysis to cover London’s housing market.
- A New Trend Shaping Up for U.S. Housing Prices? – we consider whether the U.S. housing market is getting on a stable growth track in 2014.
- The Escalation of New Home Sale Prices – If there is a stable trend forming in the U.S. housing market, we define what it may be.
- Temporal Trends in U.S. Housing – we analyze median new home sale prices as if they are a function of time. (They’re not, but we did anyway!)
© Craig Eyermann
Political Calculations
The commentary above was originally posted at Political Calculations here.