This week’s New Home Sales report (for the month of March) stole the show, reaching more than 1 million for the first time since 2006.
Although sales are up 66% year over year, prices have increased like in the past few months and are basically now unchanged from last year. What about it?
All the more puzzling (at least at first glance) is the fact that real estate prices have risen Break records according to some reports. Here is the widely used FHFA property price index:
The FHFA data refer to REPEAT sales and refinancing. That is what it means Not Capture New Property prices at the time of construction despite a thorough tracking of property prices in general.
There is a separate Home Selling Report for “Existing” Sales that better tracks the FHFA’s tracking of home prices. Fortunately, this report came out this week too. In a way, this made the plot thicken.
Unlike New Home Sales Sales of existing properties fell in March and are now well below the level at the end of 2020. Record lows are the main reason.
As expected, with home sales falling, we should not see any downward price pressure due to inventory constraints. Indeed, existing house prices easy to smash their previous record (set last month).
You can’t help but notice the rhythmic regularity in the existing home price list. This is another important clue in solving our new home price puzzle. This suggests that new home prices must deviate from the general trend for reasons of their own (i.e. something that is specific to the new home market). The reason for this is that existing houses make up a much larger part of the housing market. And because there are already – well – existing houses, their price development is clear Fewer affected by changes in buyer preferences or builder offers.
Finally we come to the answer. There is actually something about new homes that is making prices drop. In one word: SIZE. The middle house is nearly 200 square feet smaller than it was in 2017, and as anyone who has recently bought a home will know, Lot sizes have shrunk even faster. The net effect is an average new home that is smaller and more affordable.
The above pricing table would be a even bigger In contrast, there were no material prices. Wood is in the Zone of madnesshas increased by more than 300% since the start of the pandemic. Experts disagree on when the madness will end and what kind of recovery we might see.
The persistently low level of interest rates continues to help offset the high material prices. You also benefit equally from existing and new real estate prices. 2021 would have was a bad year for interest rates until April. And only last week did interest rates really move away from the recent highs in late March.
This week was another good one for prices, with the average lender back to its lowest level in almost 2 months. 10-year Treasury yields (the most widely used benchmark for longer-term rates like mortgages) have behaved well on their downward slide. The next milestone would be a break below 1.53% – a level that served as a floor both this week and last.
The continuation of this friendly trend depends on several factors. While everyone loves good prediction, they are a tricky business – especially when it comes to the future. Even if someone is right when interest rates go down, they may not be right when it comes to when or the extent of the move.
What we can Interest rates are known to be determined in the longer term by the health of the economy, the state of the pandemic, inflation, and the level of new debt issues (which are used to pay for things like Covid Relief and infrastructure). Since we don’t really know how everything will play out, we have to assume that there are several possible outcomes ranging from “moderately lower” to “significantly higher”.
Granted, if interest rates go up significantly, it is would not be overnight, but it is important to understand lessons from history. They provide two clear, timely examples of how long a “rising interest rates environment” can last and how much ground it can cover.