Short-term housing trends tend to dominate headlines, typically because only the latest monthly statistic is being reported: a single and often statistically insignificant data point in a much larger sea of housing trends.  In our data feature this week, courtesy of our analysts at HousingIntelligence.com, we decided to take a step back and examine some longer term trends of the new construction market.  Over the last several decades, the US has added about 1.2 million new households per year.  That translates to about 675,000 annual new home sales, on average.  If we take that average and run a cumulative tally of whether more or fewer homes were actually sold in each year starting in 1980, there are some interesting inflection points worth noting. 

Through much of the 1980s and the first half of the 1990s new home sales tended to lag the 675k long term 50-year average.  By January of 2002 though, six consecutive years of above-average new home sales had driven rates of new housing supply back to equilibrium.  But instead of sales levels moderating downward to the average of 675k annual sales, mortgage rates plummeted and sales took off.  The boom was on.  By November of 2004, the cumulative total exceeded one million units of oversupply compared to the long term average.  March 2008 was the peak at 2.4 million units.  As of June 2011, that has relaxed to 1.5 million units as a result of several years of depressed new housing activity.  But we arguably have quite a ways to go.  If we continued at our current annualized pace of new home sales, it would take until 2015 to get back to an equilibrium level of housing supply using this measure.  Hopefully that will be a pessimistic estimate in retrospect and economic growth in coming years hastens the turnaround.  But counteracting such substantial historical trends is difficult, and with 1.5 million units of excess new homes today, it paints a challenging picture for the industry over the medium term.

In recent housing news, data releases covering the June period were generally weak.  An increase in the National Association of Realtor’s Pending Home Sales Index and a pick up in construction activity were offset by weaker activity in both new and existing home markets.   Starts and permit data released early last week showed that construction activity picked up in June and an increase in permit activity suggested that building will remain steady in the months ahead.  However, existing home sales for June fell back to their slowest annual pace since November 2010 while new home sales dropped to their slowest annual rate since March.  Pricing continues to hold steady in both the new and existing home markets which is a positive sign.  While the increase in construction activity is promising, it will only lead to a backlog of inventory if demand for housing remains sluggish.  A sustained improvement in the labor market will be the key factor in the housing recovery.

The Economy
The advance second quarter GDP report included revisions for GDP growth dating back to the first quarter of 2007. Revisions showed that the economic downturn in 2008 and 2009 was worse than previously reported. Revisions also showed that GDP growth in the first quarter was substantially slower than previously thought. The final first quarter GDP growth figure of 1.9% was revised down to just 0.4% which is the slowest quarter of economic expansion since the second quarter of 2009.  Such a massive revision a mere month after the “Final” 1st Quarter GDP figure was released would be bordering on comical if it didn’t paint such a gloomy picture.  Clearly the fundamental health of the US economy continues to be in question, which is certainly not good for housing.

Advance estimates for second quarter gross domestic product came in below consensus estimates although it was higher the than downwardly revised first quarter figure. The data still showed that economic growth slowed considerably to begin the year. The U.S. economy grew at a meager 1.3% during the second quarter which is stronger than the 0.4% pace in the revised final first quarter figure. However, this marks the eighth straight quarter that the U.S. economy has expanded. A decline in consumer spending was offset by an increase in business spending and better trade activity.

Consumer confidence rebounded in July after posting declines in the last two months.  The consumer confidence index rose to a reading of 59.5 from a revised figure of 57.6 in June.  The index is also higher than it was this time last year when it stood at 51.0.  The index remains at historically low levels despite increasing back to its highest levels since May.  Uncertainty over the U.S. and Eurozone sovereign debt situation along with a sluggish housing and labor market continue to weigh on consumer confidence.

First-time unemployment claims declined by 24,000 to a seasonally-adjusted figure of 398,000 in the week ended July 23rd from a figure of 422,000 last week.  Initial jobless claims are now at their lowest levels since April.  The steady decline in first-job jobless claims suggests that labor market conditions have been stabilizing and are now falling to levels that may contribute to an improvement in the unemployment rate.

The leading index increased in June to a reading of 115.3 which is a 0.40 point increase from May levels.  The leading index has recorded gains in 11 out of the past 12 months.  Five out of the ten components showed month-over-month increases from May levels.  Building permits were up by the highest rate during the month.  The interest rate spread and consumer expectations were off by the greatest margin from last month.

Housing Market
The National Association of Realtors’ Pending Home Sales Index increased again in June which is a positive sign that more closings will take place in the months ahead.  The index in June increased 2.4% from the previous month to a reading of 90.9 from a May figure of 88.8.  This is the second straight month that the pending home sales index has increased.

Overall housing activity remained weak in June due to sluggish labor market conditions although mortgage rates continue to hover at historically low levels.  Both new and existing home sales in June recorded declines for the second consecutive month.  However, home prices in both housing markets were able to hold steady in spite of weaker demand.

New home sales in June declined 1.0% from the previous month to a seasonally-adjusted annual rate of 312,000 units.  New home sales are now back to their slowest annual rate since March.  Sales for the previous three-month period were also revised lower by 14,000 units.  New home sales are still up 1.6% from the 307,000 units in June 2010 but are 20.6% lower than the June 2009 figure of 393,000 units.  It is important to keep in mind that sales activity this time last year fell to near record-lows after housing demand dried up following the expiration of the federal homebuyer tax credit at the end of April.

New home prices appreciated despite weaker demand last month.  In June, median new home prices increased to $235,200 from a May figure of $222,400.  This is the highest median new home prices have been since January.  New home prices are up 7.2% from this time last year and are 9.5% higher than they were this time two years ago.

Due to higher median new home prices, the new home affordability ratio recorded only its second monthly decline so far this year in June.  The new home affordability ratio fell to a reading of 57.0% in June compared to a figure of 58.8% in May.  However, affordability in the new homes market remains at historically high levels.

New home inventory levels reached another new all-time record low last month.  In June, new home inventories declined from the previous month to 165,000 units on a non-seasonally adjusted basis compared to 167,000 units in May.  New home inventory has now recorded 46 straight months of declines and has not recorded a monthly increase since May 2007.  New home inventory on a seasonally-adjusted basis declined to 164,000 units in June from a May figure of 167,000 units.  Months of inventory declined slightly in June due to the continued drawdown in new home inventory levels which offset a slowdown in sales activity.  Seasonally adjusted months of new home inventory fell to 6.3 months in June from 6.4 months in May.  This is the least months of new home inventory on the market in five years.

The seasonally-adjusted annual sales rate of existing homes declined 0.8% from May levels to 4,770,000 units in June.  This is the third straight month that existing home sales activity has declined. This is the lowest seasonally-adjusted annual sales rate for existing homes since November.  Existing single-family home sales remained unchanged from last month at 4,240,000 units while condo and co-op sales fell 7.0% from May levels to 530,000 units.  Compared to the same time last year, existing home sales are down 8.8% from the 5.23 million seasonally-adjusted annual sales that were recorded in June of last year.  This is the fifth straight month that existing home sales on a seasonally-adjusted basis have recorded year-over-year declines.

Weaker demand did not negatively impact existing home prices in June.  The median sales price of an existing home increased to $184,300 in June from $169,300 in May.  Median existing home prices reached their lowest levels in nine years in February but have since rebounded for four consecutive months.  Median existing home prices are now at their highest levels since October 2008.  The median existing home price is 0.8% higher than the same time last year when the median price was $182,900.  This is the first month that median existing home prices have recorded a year-over-year gain since November. 

The increase in home prices pushed affordability lower last month.  The affordability ratio for existing homes in June declined again for the fifth consecutive month after hitting all-time record highs in January.  Affordability based on 30-year fixed mortgage rates declined to 66.7% in June from a revised reading of 69.3% last month.  This is the lowest the existing home affordability ratio has been since July 2010.

Existing home inventory increased in June as sales lagged.  The number of existing homes for sale increased 3.3% to a preliminary 3.765 million units.  This is the highest inventory has been since October 2010.  Existing home inventory has recorded increases in four out of the past five months.  At the current sales pace, there are 9.5 months of existing home supply on the market compared to 9.1 months in May. This is the third straight month that months of existing home supply have increased.  It is also the most months of existing home inventory on the market since November 2010.

Construction activity picked up in June although signs suggest that housing market remains sluggish as existing home sales recorded another month of declines.  The total number of homes started for the purpose of residential construction jumped noticeably in June, up 14.6% to a seasonally-adjusted annual rate of 629,000 units compared to a downwardly revised figure of 549,000 units in May. This is the highest total housing starts have been since January. The increase in overall starts was driven by increases in both the single and multifamily segments.  Single-family starts increased 9.4% from the previous month to a seasonally-adjusted annual rate of 453,000 units.

Total building permit activity, which is a sign of future construction activity, increased 2.5% in June to a seasonally-adjusted annual rate of 624,000 units.  An increase in the multi-family segment was the main driver behind the gains in total permit activity.  Single-family building permit activity increased just a slight 0.2% from May levels to a seasonally-adjusted annual rate of 407,000 units in June.

National average mortgage increased from the previous week to 4.55% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on July 28th.  This is the second straight week that rates have increased and the highest they have been since the beginning of the month.  Mortgage rates remain at historically low levels and have averaged under 5.0% for 23 straight weeks.

In the week ending July 22nd, the MBA’s seasonally-adjusted purchase index declined 3.81% from the previous week but was up 2.55% compared to this same time last year.  This is the third straight week that the purchase index has declined and the lowest the index has been since mid-February.

For additional market-level data and analysis please visit our website at http://www.housingintelligence.com.  For more detailed information on New Home Sales and other indicators, please visit the following links: