While many have been quick to
blame a relatively severe winter for economic weakness in the first quarter, it
would appear that weather had little to do with weaker growth in the US housing
market. Mortgage purchase applications have been in a downward trend since last
spring and through the week ending April 18,, 2014 they were down
18% year-over-year. Initially, declining mortgage purchase applications had
little impact on home sales, which continued to rise through the spring and
summer of 2013 as investors, purchasing with cash, continued to enter the
market. However, on a seasonally-adjusted basis, existing single family home
sales, which account for approximately 93% of the single family market, have
declined in seven of the eight months through March of this year. Year-over-year,
March sales were down 7.5% on a seasonally-adjusted basis.
New home sales only comprise
about 7% of the market. However, because they are tabulated at contract signing
while existing sales are calculated at closing, new home sales are considered a
timelier indicator. After averaging an annualized 445,000 sales per month on an
annualized, seasonally-adjusted basis, from January through June 2013, new
homes sales have averaged 423,000 over the last nine months, a decline of about
5%. March sales plunged 14.5% to a seasonally-adjusted, annualized rate of
384,000, the worst month since July of last year and the third worst in the
last 18 months.
After a relatively strong first
quarter in 2013, annualized, seasonally-adjusted housing starts were
significantly weaker from April through October, but spiked in November and
December to the highest levels of the recovery. Despite the spike at year-end, the
market averaged fewer starts over the last nine months of 2013 than it did from
December 2012 through March 2013. Construction began on fewer homes during the
first quarter of this year than during the first quarter of 2014, a fact some
might attribute to the weather. However, that rings a bit hollow given that seasonally-adjusted
starts in the first quarter were stronger than those in the second and third
quarters of 2013. In short, outside the spike in November and December, monthly
starts over the last year have been consistently below the previous recovery
peak reached from December 2012 through March 2013. Was the spike in November
and December of last year an aberration? That remains to be determined, yet it is
clear is that the growth rate in starts has slowed significantly over the last
year.
Despite weakening trends in sales
and starts, home prices and mortgage rates have risen. Despite the fact that
rates remain historically low, the combination of rising rates and rising
prices has reduced the pool of potential buyers. The median price of an
existing home in March was $198,500, 7.9% higher than in March 2013, according
to the National Association of Realtors. Meanwhile, the US Census Bureau
reports that the median price of a new home in March was $290,000, up 12.6% year-over-year.
Assuming a 20% down payment, rising prices added an additional $2,906 and
$6,490 to the down payment on the median priced existing and new home,
respectively. Assuming the same 20% down payment, the combination of higher
prices and rising rates increased the monthly payment on the median existing
home by just over $110 and that of the median new home by just over $203. With
the employment market recovering slowly and income gains modest, rising prices
and higher rates have reduced affordability.
In short, there have been signs
that the recovery in housing has been losing momentum since last spring. Sales
of existing single family homes have been in decline since late last summer,
mortgage purchase applications have suffered double-digit declines over the
last year, and the growth rate in starts has moderated. The fact that the
housing market appears to be decelerating is troubling due not only to its importance
to the overall recovery, but also due to the fact that sales and starts remain far
below long-term historical trends. The charts below show the median levels of
new home sales and starts since the inception of their respective data sets. Simply
put, despite significant improvement over the last few years, the housing
market remains depressed.
