One month doesn't make a trend.
Still, do we really need a trend to understand a truth?
Yesterday's release by the Census of September New Home Sales--all the caveats of volatility and noise in those numbers, notwithstanding--say this. There's, likely, a mismatch in what the market (builders) is offering and what the market (home buyers) can and will bear.
Post-mortem analysis of NHS' "September Surprise" mostly takes glass-half-full vs. glass-half-empty stances. A dramatic miss in the monthly tally contrasts with expectations, and people start to talk--as they have on and off for the past two years--as if the housing recovery has, "collapsed" and gone off the rails.
Others see the one-month data point not necessarily as a new direction but as a quick gust typical of volatile measures with wide margins of error.
One of the perspectives we regard as most dependable is Calculated Risk's Bill McBride, who's take he sums up here:
Even though the September report was disappointing, sales are still up solidly year-to-date. The Census Bureau reported that new home sales this year, through September, were 392,000, not seasonally adjusted (NSA). That is up 17.6% from 333,000 sales during the same period of 2014 (NSA). That is a strong year-over-year gain for the first nine months of 2015!
National Association of Home Builders economist Rob Dietz suggested the slippage may tie to a weaker series of jobs data in the past few months, which could work its way into consumer sentiment, and impact decision-making on whether now's the time to buy or not.
September’s sales decline appears to be due to demand-side weakness, perhaps related to recent lackluster economic activity at the start of the Fall. For example, total job creation for August and September was only 136,000 and 142,000 for each month respectively.
The issue, though, is what to take away, and how to try to behave in light of the facts of this data. And the simple facts are these. New home sales are a long way from "recovered," and for the economy to solidify and sustain a positive trajectory in spite of some series global challenges, new home sales are going to need to play a more robust part in that drama.
Look at Bill McBride's monthly reminder that things are not all well with housing, his "distressing gap" chart that plots existing home sales trends and new home sales, with "x axes" mirroring one another. The two trend lines that ran neck-and-neck from 1994 to 2007 have decoupled and run at distant odds from one another ever since the Downturn.
One explanation comes to mind for a spread that hasn't narrowed beyond the 1 new home for every 12 resales margin. Pricing.
The differential--$296,000 median price for a new home in September vs. $221,000 for a resale--is laden with reasons why and why not.
At the home buyer level though, that 34% difference means something.
What's really likely to be happening is that the market for $296,000 new homes has begun to be saturated and well-served. There's only just so many people with great jobs, a chunk of change in cash to put upfront, and no problematic contingency property to dispose of to count themselves in that early leg of the demand pool.
We're aware that home builders of all stripes are moving mightily to develop and open new communities whose homes will price closer to the median existing home sales price. When the difference, say, is 13% rather than 34%, the median price for a new home would be $250,000 vs. the $221,000 for a resale.
The challenges are known and they're not going to dissolve magically.
For one, home builders aren't going to get into selling a whole lot of homes at that $250,000 price point if they can't lock in labor capacity and direct costs that jive with that value proposition. So, as we've noted before, sometimes supply begets demand, and, in turn, a lack of supply (at that lower price tier) may be choking demand.
Of course some of the problems go back to overpaying for land, something few builders will admit to, and one really can't blame them for it, because modeling the returns on lots is particularly tricky in early recovery when there's a low base of transactions to calculate against.
Reasons for overpaying are legion. Land base costs are, singly, the most important factor in home price decisions, calculations, and possibilities. Site costs are the most rigid expenditure when it comes to new home developments.
Lurking, though, among them is that regulations in many localities cut off their nose to spite their face. Plain and simple, local officials' agendas on development are fraught--as they've been for time immemorial--with political axes to grind, social engineering schemes, and the most cynical expressions of exclusionary, isolationist, undemocratic behavior in action.
And we elect these people. We put many of them in their offices. For them, the American Dream had a cut-off date of 2005 or so. After that, it's really anybody's guess as to how they think opportunity in this country should work.
The truth--whether you need a trend to convince you or not--is that the market of new homes is in a mismatch with the demand for new homes. Since 2010, the U.S. population has grown by 12 million people, and the number of households has grown during that same time period from 117 million in 2010 to 123.2 million in 2014.
More people need new homes. The market to meet that need is still wide open. Local governments are an impediment. So? Where does the American Dream play a role here?