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The Demand Stars Align for Continued Strength in Housing
Jonathan Smoke / Hanley Wood / June 25, 2013
Hanley Wood chief economist Jonathan Smoke’s commentary on Spring Sales, Prices, and Consumer Confidence
Today is a big day for getting a read on how housing demand has been unfolding as preliminary May numbers on new home sales were reported by the Commerce Department, Case-Shiller released April home price indices, and the Conference Board released June consumer confidence data. Interpreting each of these data points bears caution as these monthly metrics can be somewhat volatile and are subject to revisions, but when we look at these numbers and our own research we see several key trends worth highlighting that bode well for the future.
On the sales side, new home sales are clearly up year over year and we expect the sales numbers to remain strong through the summer. However, we are not expecting significant gains in the volume of new home sales in the second half of the year as builders are controlling inventory to optimize price gains while allowing land development to catch up.
New home traffic and sales contracts in May 2013 continued to increase as a six-month moving average, according to data from the Metrostudy weekly traffic and contract survey collected in 90 of the most significant housing markets in the country. The moving average for May saw a rise of 6.83% for traffic and 14.68% for new home contracts when compared with the same for the prior month. Three-month moving averages were also up, with traffic showing a 1.01% bump and contracts a larger 6.76% jump in May’s average thanks to a strong spring season.
Although fluctuations across markets on a weekly basis continue, weekly averages in June for both traffic and contracts have remained above those for the same time last year. The most recent June numbers indicate a residual surge in contracts from spring shopping, with a 2.7% jump in average contracts for the week ending June 16 over the prior week. Additionally, a traffic surge early in the month has the potential to create another spike in upcoming sales activity with successful conversions. While overall activity continues to remain up, the slowdown as lot inventories diminish and builders respond with price increases is still expected to develop over the second half of the year.
Like sales, home prices are clearly up year-over-year. According to our closings data, the median new home price for closings through April in 2013 was $254,200, which represents a 7.5% gain over 2012. Non-distressed resales show a similar 7% gain over 2012.
We expect prices to continue to rise in the second half of 2013 as supply remains tight. But we expect greater appreciation in new home prices than existing as inventories remain at historic lows while the size and type of new homes built are likely to increase.
Consumer confidence remains strong with the latest reading from the Conference Board. At 81.4, the preliminary June index is at its highest level since January 2008 and up 9.5% from the prior month. However, we think the most telling data point is not the headline number. The Conference Board also tracks plans to buy a home and the preliminary number for June indicates that 5.5 % of consumers plan to buy a home in the next 6 months. That number brings the second quarter of 2013 up 14.6% over the same period last year and the first half of the year to the highest six-month start in the history of the index.
Bottom line: Consumers feel better about the future overall but they feel even better about housing as they have seen gains in home prices. This is translating to continued strength in traffic and increased sales as pent up demand is being unleashed despite still tight credit conditions. We would have even more sales if there were more supply of new and existing homes available, but constraints there will continue to provide support for future price increases. Concerns about rising interest rates squelching the housing recovery are way overblown. If anything we think the rise in mortgage rates will encourage even more would be buyers to get off the sidelines before both prices and interest rates are much