New home sale rose 2% in February after being revised up for the previous month. Gains remained extremely uneven, however, with an increase in sales in the West more than offsetting declines in other regions during the month. Median new home values also picked up, but mostly because of the concentration in the more expensive Western markets.
What concerned us in the data was the lack of momentum in the South, the region which is essential for the volume of new construction in the single-family market. The South accounts for more than half of all new home construction. Historically, developments in the South also have provided a larger stock of first-time buyer homes.
This report is only slightly more encouraging than the report on existing home sales for February; it reinforces our view that the supply of move-in ready homes remains a major constraint on the housing market. Existing homes sales weakened in February, as tight inventories, particularly for first-time buyer homes, constrained sales. Bidding wars remained common, while investors continued to snap up properties they plan to flip and rent.
The growing gap between supply and demand is showing up in housing prices. The Federal Housing Finance Agency (FHFA) home price index continued to accelerate on year-over-year basis in January. It also moved up much more rapidly than the year-over-year measures of core inflation, which were once considered an anchor for housing price appreciation.
Separately, the volume for mortgage applications remained strong through the first half of March, rising more than 25% from a year ago. That suggests that bidding wars could intensify with prices accelerating even more rapidly if we don’t see a lot more in terms of listings and construction activity in the single-family market.
What’s slowing construction? Builders complain that stricter zoning laws, rising materials costs and a shortfall in less-expensive immigrant labor have all constrained their ability to build more affordable housing. This is at the same time that existing home owners could not or would not do the necessary repairs and renovations in order to list their homes for sale as move-in ready properties in recent years.
Bottom Line: The demand for housing is recovering faster than the supply, particularly for less expensive homes. This is creating hurdles to the volume of activity in the market and increasing complaints about affordability, despite a persistently low interest rate environment. The result shows up in housing appreciation, which is important when determining wealth effects for consumers but not nearly as large of a stimulant for
overall consumer spending. The increase in single-family home prices could also show up in accelerating inflation, which would intensify the already heated debate at the Federal Reserve about the pace of raising interest rates.