Political  Calculations

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

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.