What's Driving the U.S. Housing Market?

Political  Calculations
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Posted: May 05, 2014 12:01 AM
What's Driving the U.S. Housing Market?

After falling in February 2014 for the first time since June 2012, the initial median new home sale price in the U.S. reported for March 2014 increased by the largest percentage ever recorded since the U.S. Census Bureau began tracking this data back in January 1963. To put numbers to that achievement, the median new home sales price increased by 11.2% from February 2014's revised figure of $260,900 to March 2014's initial figure of $290,000.

At the same time, the preliminary estimate of 384,000 new home sales for March 2014 was significantly lower than the 449,000 recorded in February 2014.

Our chart below puts the trailing twelve month average of median new home sale prices into context with respect to median household income in the U.S., which allows us to account for annual seasonality in the housing data while also smoothing out the volatility of the median income data.

U.S. Median Trailing Twelve Month Average of New Home Sale Prices vs Median Household Income, December 2000 through March 2014

So why did the month-over-month median sale prices of new homes rise so much while the number of new home sales fell by so much?

The answer has a lot to do with the distortionary effects of the second U.S. housing bubble. One of the defining characteristics of a housing bubble is the effect that it has on the sales mix of new homes being sold. Here, as a housing bubble matures, builders come to pursue a strategy of trying to maximize their profits by producing an increasing share of new homes at higher and higher sale prices. Our chart below shows how distorted the mix of new homes being produced and sold has become:

New Home Sales Mix for Trailing Twelve Month Average of Thousands of New Home Sale Prices January 2003 through March 2014

But that strategy risks throwing the market into extreme volatility as the supply of more affordable homes becomes depleted. In this case, that portion of the available supply was effectively depleted in February 2014, leaving behind a large pool of much higher priced homes that were still on the market in March. Homes that were priced well above the affordable reach of typical U.S. home buyers, which is why the number of sales fell so dramatically from the previous month and also why their median sale price increased so dramatically from the previous month for the sales that did occur.

It is then the mismatch between the sales mix of the new homes available for sale and the household income of the potential pool of home buyers is what caused the number of new home sales to plummet in March 2014 as their median sale price skyrocketed. Just the same as what happened during the deflation phase of the first U.S. housing bubble as it picked up speed in the months following the sales volume peak recorded in January 2006.

Trailing Twelve Month Average of Thousands of New Home Sale Prices January 2003 through March 2014

Consequently, what we're seeing the in data today is consistent with the second U.S. housing bubble peaking as it enters its own deflation phase.

Elsewhere on the Interwebs

Barry Ritholtz answers the question of Where Are All the Homebuyers? Be sure to follow the links at the bottom of Barry's article that pick up on other aspects affecting the U.S. housing market.

The WSJ's Nick Timiraos reports on Why Home Price Gains Aren't Lifting the Economy.

Data Sources

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 23 April 2014.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold by Sales Price: U.S. Total (2002-present). [PDF Document]. Accessed 28 April 2014.

Sentier Research. Household Income Trends: March 2014. [PDF Document]. Accessed 28 April 2014. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]