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New Home Sales In June Reach Strongest Pace In 8 Years

The latest report by the U.S. Department of Housing and Urban Development reveals sales of new single-family houses in June 2016 reached their strongest monthly sales pace since 2008. The month of June saw purchases of new homes rise 3.5 percent to a seasonally adjusted annual rate of 592,000 units, compared to the revised May rate of 572,000.

The U.S. housing market continues to enjoy a gainful first half of 2016, with the trend expected to continue in the second half. Sales in June were up 25.4 percent compared to 2015, while the median sales price of new homes sold in June was $306,700, a 6.1 percent increase from a year ago. The increase in new homes was contributed primarily by the Midwest and West, which saw activity for new homes increase 10.4 percent and 10.9 percent respectively.

“We expect housing to continue to firm, on average, over the medium term, with a buoyant household sector supporting both prices and volumes,” said Rob Martin, an economist for Barclays.

Following the trend of new home sales, existing-home sales for the month of June also reached a nine-year high, according to the National Association of Realtors (NAR). Purchases for existing-homes, which includes single-family homes, townhomes, condominiums and co-ops, rose 1.1 percent to a seasonally adjusted annual rate of 5.57 million, up three percent from the same period in 2015.

“Sustained job growth as well as this year’s descent in mortgage rates is undoubtedly driving the appetite for home purchase,” said NAR Chief Economist, Lawrence Yun.

Total home sales were up five percent compared with the first half of 2015, while the median price for existing homes has also increased five percent as of June, setting a new record.

Factors Driving the Housing Market

According to Realtor.com, the 2016 spring selling season was the most gainful in over a decade.

“We are seeing the leading edge of millennials entering into homeownership in large numbers, particularly in more affordable markets,” said Realtor.com Chief Economist Jonathan Smoke.

“At the same time, more baby boomers are making retirement decisions, providing inventory and powering sales.”

Factors driving the U.S. housing market in 2016 have been a combination of historically low mortgage rates and an undersupply of inventory. The average rate for a 30-year fixed-rate mortgage was 3.57 percent in June from 3.98 percent in June 2015; and inventory of new homes increased 1.2 percent to 244,000 units last month. However, at June’s sales pace it would only take 4.9 months to clear the inventory.

“Sales so far this year have been able to grow because inventory has moved more quickly. We’ve seen the lowest national median days on market for listings on realtor.com in May and June (65 for both) than we have seen at any point in the recovery,” said Smoke.

“But we can’t continue to squeeze out more sales by upping the pace. We are likely close to the limit of how fast inventory can turn over. Eventually, without substantial growth in existing and new-home inventories, sales growth will probably flatten and even decline—despite strong potential demand.”

Will The Good Times Continue?

It’s likely new home sales are benefiting from low mortgage rates and tighter inventory levels, but potential homebuyers, especially first-time homebuyers, are feeling the effects. With demand outpacing supply, homebuyers have responded by making aggressive offers that so far saw 23.6 percent of homes sell above the list price, up 22.2 percent from the previous year.

One of the indicators used to measure future home sales is known as the Pending Home Sales Index, a forward-looking guide based on contract signings. Pending home sales in June remained mostly unchanged, inching 0.2 percent from the previous month to 110. Although the index is at its highest peak in the past year, it’s still down from last year’s level in April of 115.0.

“Unfortunately for prospective buyers trying to take advantage of exceptionally low mortgage rates, housing inventory at the end of last month was down almost 6 percent from a year ago, and home prices are showing little evidence of slowing to a healthier pace that more closely mirrors wage and income growth,” said Yun.

Surprisingly, another aspect that could influence the housing market in the second-half of 2016 is mortgage rates. Although the Federal Reserve has yet to increase the interest rate policy, they could later this year if the Fed sees signs of economic growth and inflationary pressures.

“Keep an eye out for how mortgage rates move just before and after the August employment report on the Friday before Labor Day (Sept. 2). Then pay close attention to the Fed meetings on Sept. 20–21. Even if no policy change is announced, they could use language in their statement that strongly hints at an increase in October,” said Smoke. “Either way, mortgage rates are likely to move higher.”

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