Inflation is not Recovery

Housing Recovery Is An Illusion While Housing Inflation Rages

by Lee Adler, Wall Street Examiner

The new home sales industry remains extremely depressed, with activity near historical lows in spite of the biggest August sales increase in 7 years. Housing may not be a drag on the economy, but the idea that it’s making a positive contribution is not supported. Meanwhile housing inflation rages, with new home prices above the levels at the top of the bubble in 2006.

If that was a bubble, what’s this?

New Home Sales and Traffic - Click to enlargeNew Home Sales and TrafficClick to enlarge

The Commerce Department reported a headline number of 421,000 new home sales in August. The consensus of economists’ guesses was for 415,000. The median sale price was $254,600. That compares with $253,200 a year ago, and $243,900 in August 2006 near the peak of the bubble. The median price has risen 22.9% since August 2009, near the bottom of the crash.

The actual number (not seasonally adjusted) of units sold in August was 35,000, up 1,000 from July and up 4,000 or 13% since August 2012. Back in the halcyon days of the bubble August sales were in the 100,000 range.

Apparently, higher mortgage rates aren’t crushing demand. My experience of 40 years either in or analyzing the real estate industry has been that demand increases when rates rise, until it doesn’t. Seeing rising rates and prices, potential buyers get off the fence. At some point that process stops when monthly carrying costs become unaffordable for most buyers, but we’re not there yet.

The monthly gain for this month was better than the typical August over the past 9 years, which usually had a decline. The average monthly decline for the month over the previous 9 years was -5.3%. Last year the drop was -6.1%. This year, August sales rose by 2.9%, the best showing since the peak of the bubble in August 2006. This was a rebound from the biggest July drop of the past 9 years.

Buyers who stepped aside in July changed their minds and came back in August. This was consistent with the NAHB builders survey for August as reported here last month:

Conversely, the NAHB builder’s survey data for August, taken in early August, indicated that more builders were seeing better business in August. The July drop shown in the Commerce Department data may be transitory. The initial Commerce Department release is based on a tiny sample survey and subsequent monthly revisions are often substantial. We won’t know for certain if the sales uptrend is actually broken for several more months, and perhaps until the usual seasonal trough in January and February.

Apparently the uptrend is still intact. But it’s important to keep this in perspective. In the context of historical norms, this is not a recovery. Sales remain extremely depressed relative to the normal levels of the past couple of decades. Construction employment remains extremely depressed. Furthermore single family starts are outpacing sales. If this continues, it will lead to a cutback in construction and the housing industry would again be an economic drag.

Housing Inflation Not Housing Recovery - Click to enlargeHousing Inflation Not Housing RecoveryClick to enlarge

While housing activity remains moribund, housing inflation is raging. We may not have a recovery, but in terms of prices, we do have a bubble. New house prices recently hit all time records and remain at a record August level even with the usual second half seasonal pullback under way. If 2006 was a bubble, and prices are even higher today, then this must be a bubble too.

New house inventories have been rising over the past year, but they remain historically low and the inventory to sales ratio remains tight. Prices are likely to rise until inventories increase more or sales drop. It’s a distorted market. There’s little evidence that that will change anytime soon.

New House Sales and Inventories - Click to enlarge

New House Sales and InventoriesClick to enlarge

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