Monday, January 27, 2014

New Home Sales: Weak Finish, Solid Growth in 2013

by Bill McBride on 1/27/2014 11:35:00 AM

Earlier: New Home Sales at 414,000 Annual Rate in December

Although sales in December were weak, the Census Bureau reported annual sales were up 16.4% from 2012.  This was the highest level for sales since 2008, but still the sixth worst year on record.

Sales would have been higher in 2013, except some homebuilders were land constrained (not enough entitled land), and many homebuilders pushed prices sacrificing a little volume.  Still a 16% annual increase in sales is solid growth.

This table shows the annual sales rate for the last ten years.

Annual New Home Sales
YearSales (000s)Change in Sales
20041,20310.8%
20051,2836.7%
20061,051-18.1%
2007776-26.2%
2008485-37.5%
2009375-22.7%
2010323-13.9%
2011306-5.3%
201236820.3%
201342816.4%

Even with the sharp increase in sales over the last two years, 2013 was the sixth worst year for new home sales since 1963. 

The sales rate was only lower than 2013 in the worst housing bust years of 2009 through 2012, and the worst year of early '80s recession (1982).

Worst Years for New Home Sales since 1963
RankYearNew Home Sales (000s)
12011306
22010323
32012368
42009375
51982412
62013428
71981436
81969448
91966461
101970485
112008485

Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the 428 thousand sales in 2013.  This suggests significant upside over the next several years.   So I expect the housing recovery to continue.

Note: Inventories of completed and "under construction" homes are still historically low. The Census Bureau reported 40 thousand completed homes for sale, just above the record low set in June 2013. And there were 97 thousand homes "under construction" in December, well below the median of 185 thousand over the last 40 years. So there are no concerns about too much inventory (inventory is probably too low in some areas).

And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years.

Distressing GapClick on graph for larger image.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through December 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I expect existing home sales to decline some (distressed sales will slowly decline and be partially offset by more conventional sales).  And I expect this gap to close - mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

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