New home sales surged at a 592,000-unit annualized pace in June after being revised up for the month of May. Gains were concentrated in the Midwest and West. The Midwest has seen resurgent demand from first-time home buyers. Builders say they are finding it easier to build more affordable homes here in the Midwest than elsewhere. Land-use fees have skyrocketed in the West, which is keeping housing skewed more toward the higher end.
Overall, housing supplies remain extremely constrained relative to demand; inventories dropped below a five-month supply in June, the lowest pace since February 2015. That, coupled with the move upscale on the coasts, continues to buoy new home prices. The premium between new and existing home prices remains extremely wide.
Sales in the South, always a key driver in the new home market, changed little in June though gains held near the highs hit earlier in the quarter so they are still up substantially (more than 20%) from a year ago. A shortfall of construction in the South, which was among the hardest hit by the subprime crisis, is one of the key reasons we have not seen a more self-sustaining recovery in home construction, including growth in jobs building new, single-family homes.
The Case-Shiller housing price index for May showed signs of deceleration, but remained strong historically. That was in line with other measures of existing home prices and at least partially reflects a return of first-time buyers to the market. Existing home sales, reported last week, surged on the heels of strong first-time buyer demand.
Bottom Line: The housing market showed signs of momentum during the second quarter and into the summer months. Home buying is the single largest factor leading to additional consumer spending. It will help to carry the U.S. economy though an otherwise turbulent summer abroad. Europe is still posting very uneven growth, with the uncertainty following the Brexit vote casting a shadow over the region’s economy.. Look for the Federal Reserve to be more divided as Fed officials try to balance what looks to be fairly good U.S. economic data with concerns that growth abroad may falter.