Median New Home Sale Prices Falling

Feb. 05, 2019 6:09 AM ETVNQ, IYR, XHB, ITB, RQI, SCHH, RNP, RFI, KBWY, DRN, NRO, URE, ICF, XLRE, JRS, RWR, SRS, FREL, PKB, DRV, SEVN, NAIL, LRET, REK, FRI, PSR, HOML, USRT, WREI, IARAX, RORE, BBRE, PPTY

Summary

  • Since peaking in February 2018, the relative affordability of new homes being sold in the United States has continued to improve through November 2018.
  • Nationally, November 2018 saw the initial estimate for the median sale price of new homes sold in the U.S. drop to $302,400, the lowest level recorded since February 2017 and 12.5% below the peak value of $343,400 recorded in November 2017.
  • In November 2018, 30-year conventional mortgage rates peaked at 4.87%, the highest they've been since February 2011, nearly a full percentage point higher than the 3.92% recorded in November 2017.

Since peaking in February 2018, the relative affordability of new homes being sold in the United States has continued to improve through November 2018, the last month for which the data is available, where rising mortgage rates, falling new home sale prices, and rising incomes have combined to produce that outcome in the national-level data.

The following chart shows the history of interest rates for 30-year conventional fixed-rate mortgages in the U.S. from April 1971 through November 2018.

In November 2018, 30-year conventional mortgage rates peaked at 4.87%, the highest they've been since February 2011, nearly a full percentage point higher than the 3.92% recorded in November 2017. Mortgage rates began falling in December 2018, pacing the decline in the yields of the 10-Year U.S. Treasury that began in mid-November as global economic growth began visibly deteriorating.

Although U.S. economic growth has been stronger than the global economy, rising mortgage rates have made it more costly to afford the monthly payments for high-priced homes in the regions of the U.S. that have been experiencing shortage conditions, particularly in the western region states of California, Oregon, and Washington, causing those markets to sharply slow, sending both sale prices and the number of sales lower.

Nationally, November 2018 saw the initial estimate for the median sale price of new homes sold in the U.S. drop to $302,400, the lowest level recorded since February 2017 and 12.5% below the peak value of $343,400 recorded in November 2017.

Smoothing the month-to-month volatility in median new home sale prices out by calculating their trailing twelve-month moving average, we find the initial estimate for November 2018 marks a downward turn in what had been a relatively flat trend since April 2018. At the same time, median household incomes in the U.S. have continued to rise. In the following chart, we've shown the trajectory of the trailing-year averages of median new home sale prices against median household incomes from December 2000 through November 2018.

Falling median new home prices and rising median household incomes are combining to improve the relative affordability of new homes sold in the U.S. The following chart shows the ratio of median new home sale prices to median household incomes since 1967.

After peaking at 5.45 times median household income in February 2018, the ratio of median new home sale prices to median household income has fallen to a preliminary value of 5.22 in November 2018. Although this figure is still historically elevated, it does mark an improvement in the relative affordability of new homes sold in the U.S. to levels last seen in late 2014.

This trend can be considered to be the silver lining in an otherwise cloudy environment for the new home market in the United States. We'll take a closer look at what falling prices means for the real estate industry later this week.

References

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed February 1, 2019.

Sentier Research. Household Income Trends: November 2018. [PDF Document]. Accessed December 28, 2018. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed January 31, 2019.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Ironman is the alias of the blogger at Political Calculations, a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics. We should acknowledge that Ironman is either formerly or currently, and quite possibly, simultaneously employed as some kind of engineer, researcher, analyst, rocket scientist, editor and perhaps as a teacher of some kind or another. The scary thing is that's not even close to being a full list of Ironman's professions and we should potentially acknowledge that Ironman may or may not be one person. We'll leave it to our readers to sort out which Ironman might behind any of the posts that do appear here or comments that appear elsewhere on the web!

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