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Will Fed Give New Home Sales More Pain After April's Fall?

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Sales of new homes in the United States dropped in April after gaining in March. In fact, new home sales faltered in three of the last four months this year, suggesting the travails of the housing market in winning back momentum. Housing starts and building permits also fell 3.7% and 1.8%, respectively, in the month.

Sales of newly constructed single-family homes, accounting roughly 10% of all U.S. home sales, dropped 1.5% in April from the prior month to a seasonally adjusted annual rate of 662,000 units, per data released on May 23 by the Commerce Department. Meanwhile, sales data for the prior three months was also revised down. The revisions revealed that sales in the first three months of the year were not as strong as earlier reported.

April’s figure was curtailed by a sharp decline in the West that sank 7.9%. On the contrary, sales rose 0.3% in the South, which accounts for the majority of new home sales. Again, sales jumped 11.1% in the Northeast and were unchanged in the Midwest month over month.

On a positive note, new home sales were up 11.6% year over year, despite the month-to-month irregularity. This was driven by a 26.4% improvement in the Midwest, 18.9% in the West, 6% in the South and 5.3% in the Northeast.

Again, although April starts and permits tumbled from the March figure, housing starts were up 10.5% from April 2017 buoyed by a 7.2% increase in single-family homes, and a 19.1% surge in apartments. Again, permits were 7.7% above the April 2017 rate of 1.26 million units prompted by a 7.9% surge in single-family homes and 6.4% growth in buildings with five units or more.



Is Tight Inventory or Rising Mortgage Rate the Culprit?

The U.S. housing industry is already challenged by a shortage of homes for sale, suitable land and skilled labor. That said, there were 300,000 new homes on the market in April, the highest in nine years and up 0.7% from March and 12.4% from a year ago. This is expected to bring some relief in the beginning of the spring selling season. At April’s sales pace, it would take 5.4 months to clear the supply of houses on the market, slightly up from 5.3 months in March.

Limited land availability is pushing up prices, as the median sales price of a new home rose 0.4% year over year to $ 312,400 last month.

Again, higher mortgage rates could also be the reason for this downfall. Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year at around 4% but began rising thereafter. Mortgage rates are surging in proportion to U.S. government bond yields in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve.

The 30-year, fixed-rate mortgage rose to an average interest rate of 4.61% for the week ended May 17, 2018, the highest level since May 2011, according to mortgage finance agency Freddie Mac. Higher mortgage rates accompanied with higher home prices might be hitting on affordability.

Separately, according to the latest Mortgage Bankers Association's (“MBA”) seasonally adjusted weekly survey for the week ending May 18, 2018, total mortgage applications fell by 2.6% from a week earlier. Purchase applications for new loans fell 2% from the previous week, while refinance applications plunged 4%, the MBA reported. The refinance index is currently at its lowest level since December 2000.

Fed Sees Next Hike Soon

Minutes from the meeting, which ended May 2 and were released on May 23, reveal that Fed officials are on track to raise rates again in June. Officials at the Federal Open Market Committee concluded the May 2 meeting with a unanimous decision to keep the Fed’s benchmark interest rate unchanged, at the range of 1.5% to 1.75%. The Fed last raised interest rates in March, by a quarter of a percentage point.

The rise in interest rates comes at a time when values of homes are marching up with higher demand and lesser supply. The situation could be detrimental for first-time buyers, raising affordability issues. This is evident from the latest report of purchase applications for new loans that fell 2% from the earlier week.

Importantly, some of the notable stocks in the homebuilding sector have been slumping. Shares of Lennar Corporation (LEN - Free Report) have declined 18.2% since the start of the year, while D.R. Horton, Inc. (DHI - Free Report) is down 18.6%. Meanwhile, shares of luxury homebuilder Toll Brothers, Inc. (TOL - Free Report) have dipped 16.9% this year, while KB Home (KBH - Free Report) stock is down 17.8%. In comparison, the Zacks Homebuilding Industry has slipped 19.5% so far this year.

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