Economy Watch: More Good News About Home Sales

New home sales are gradually starting to increase. What this could mean for the economy, and CRE.

By Dees Stribling, Contributing Editor

Housing sale reports typically come in tandem, and on Tuesday it was the turn of new home sales. The news was good, with sales increasing in May, mirroring the increase in existing home sales reported the day before. In some ways, new housing is more important to the wider economy than existing housing because of building a new house is a complex process that stimulates demand in various sectors, such as for skilled labor and the many kinds of building materials involved. In fact, like a healthy auto industry, a healthy residential development industry is an important pillar of the modern economy (and indirectly, thus important to CRE demand). Since the recession, it’s been a wobbly pillar.

Sales of new single-family houses in May 2015 came in at an annualized rate of 546,000 units, according to the Census Bureau and HUD on Tuesday. That’s a gain of 2.2 percent compared with the revised April rate of 534,000 and 19.5 percent above the May 2014 rate—quite a strong increase year-over-year. The increase wasn’t distributed evenly across the nation, however. The year-over-year increases were concentrated in markets in the South and the West, with sales in those regions up 33.3 percent and 25.5 percent, respectively. Sales in the Northeast and the Midwest dropped over the year, 21.1 percent and 12 percent, respectively.

The latest rise is part of the recovery in new home sales since the end of the recession, but it’s been a slow process, and historically speaking, new home sales still aren’t very robust. Sales peaked almost 10 years ago at an annualized rate of 1.4 million units, an unprecedented number that had been building up for the 10 years before that (since the mid-90s, in other words). Not even the mild recession of the early 2000s did much to stop the bubble. But when the bubble finally did pop, new home sales dropped to less than 300,000 units a year by 2010—the lowest ever recorded by the government, which began tracking new home sales data during the Kennedy administration.

Before 1995, new home sales tended to be between 600,000 and 800,000 units a year, with only short drops to around 400,000 during recessions, even the recessions of the early ’70s and ’80s. So while the current rate is a lot better than the recessionary post-bubble period about five years ago, it isn’t that great, and it’s been  a long slog even to get this far. Some reasons: fewer young households are buying starter houses, thus slowing down older households from buying new; underwriting standards are much tighter than 10, and even 20 years ago; and of course wages and salary growth has been lousy since the end of the recession.

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