April New Home Sales and March Housing Prices

KEY DATA: Sales: +6.8%; Median Prices: +8.3%/ Case-Shiller National Prices (Year-over-Year): +4.1%/ FHFA Home Prices (Year-over-Year): +5.2%

IN A NUTSHELL: “Housing market demand is continuing to improve and a lack of supply is helping drive up prices.”

WHAT IT MEANS: The wicked winter’s woes seem to have faded at least when it comes to the housing market. New Home sales rebounded from a strange collapse in March as demand soared in the Midwest and rose solidly in the South. But the improvement was not across the nation as there was a modest downdraft in the West and the Northeast remained in the doldrums. Indeed, while demand for the first four months of the year compared to the same period in 2014 was up by anywhere from 12% to 43% in the rest of the nation, it was down by 24% in the Northeast. I am so glad that is where I live. Prices also increased solidly, but firming sales were only part of the story. Supply is not rising and the inventory of new homes for sale has been largely flat for most of this year. That contributed to a jump in home prices. Hopefully, the higher prices will convince builders to dig a little more. There has been an interesting pattern in the distribution of sales: They seem to be centering more on middle-level homes, those in the $200,000 to $500,000 range. Over 68% of the homes are sold so far this year have been in that range compared to only 63% last year. Most of the increase has come from the lower-priced segment, which is good news for developers.

There are other signs that home prices are rising solidly. The S&P/Case-Shiller Home Price National Index was up solidly in March, as was the more closely-watched 20-City Index. (I prefer the national number as it brings into play a lot of smaller metropolitan areas. And any index that doesn’t include Philadelphia should be dismissed anyway!) More seriously, in March, every one of the twenty cities seasonally adjusted indices was up. A similar result was seen in the Federal Housing Finance Agency’s (FHFA) House Price Index. In March 2014, prices increased solidly. Forty-eight states posted gains over the year in the first quarter.

MARKETS AND FED POLICY IMPLICATIONS: As with the weather, the housing market seems to be heating up. This sector had been pointed to as an indicator of the softening of economic activity, but that is not longer the case. But what we really need to see is the higher prices inducing builders to actually build more homes. That would accelerate growth and provide some comfort to the Fed, which really does want to raise rates. Fed Chair Yellen made that clear last week when she commented that a rate hike this year was still likely. And as I have said before, rising rates could accelerate the recovery in the housing market, at least for a while, as it would force lackadaisical buyers to actually make decisions. Investors will likely see this as pointing to improving but not soaring growth. Keep in mind, new home sales need to nearly double before we get to robust levels, so the sector still has a lot of improvement left in it.