New home sales jumped to a 619,000 unit pace in April, up more than 16% from March. Moreover, gains were concentrated in the South, which is the largest new housing market in the country and critical if we hope to keep the housing market recovery on track in 2016. Median new home prices also rose sharply, particularly from a year ago, reflecting a shortfall in move-in ready properties in the existing market.
The costs of land and construction materials have surged in recent years. Those increases have forced builders up the housing food chain, chasing more affluent trade up buyers instead of first time buyers. This is despite a resurgence in first-time buyer demand and is exerting upward pressure on home values in recent years. Prices in the existing market appear to be picking up steam as well; bidding wars on move-in ready properties are common.
Meanwhile, the stock of new homes for sale on the market plummeted. The inventory of new homes dropped to a 4.7-month supply in April, down from a 5.5-month supply in March. That drawdown in inventories coupled with the surge in prices we saw should draw more builders into the market. A recovery in the South, in particular, would help volumes, and push up employment fairly significantly over the summer.
Bottom Line: The surge in new home sales against a backdrop of rising prices and plummeting inventories will be used as yet another reason for the Fed to raise rates in June. The spillover effects for the rest of the economy of a more significant rise in new home construction is particularly large, and could bring construction workers who were sidelined by the crisis back into the labor market over the summer.