Tuesday, October 28, 2014

Sales Fatigue in America's Real Estate Market

While there is little doubt that the housing market has come off its post-Great Recession lows, several factors show that the current situation is far from healthy and gives us a sense of just how bad the Great Recession was compared to recessions going back to the early 1970s.  One of those less than stellar factors is the number of new single family homes sold. 

Here is a graph from FRED showing the number of new single family homes sold in the United States:

September's level of 467,000 was the highest since the end of the latest recession, up very slightly from 466,000 in August 2014.

Here's a closeup graph showing what has happened to new single family home sales since the end of the Great Recession:

Notice the tail of the graph?  From January 2013 when there were 453,000 new single family homes sold to the present, there has basically been no improvement in the number of single family homes.  That's 21 months of stalled new home sales.   Here is a graph showing the percent change in sales  from the previous year since the end of the Great Recession:

Since June 2013, the market for new single family homes has shown very erratic growth rates ranging from +28 percent in June 2013 on a year-over-year basis to -11 percent in July 2014.  This is far different than the period between October 2011 and June 2013 when every month showed year-over-year positive sales growth.

Let's look back at the first graph.  If we take out the elevated level of new single family home sales between the end of the 2001 recession and the beginning of the Great Recession (aka the housing bubble), between July 1965 and September 2014, on average, the annual rate of new single family home sales was 605,695, 30 percent higher than the current level.  In fact, way back in July 1965 when most of us were wearing short pants, the annual sales rate of new single family homes was 554,000, 18.6 percent higher than the most recent month's sales.  To put this into perspective, in July 1965 the population of the United States was around 194.3 million people, 63 percent lower than it is today and yet, on an annual basis, 87,000 more new single family homes were sold in that month than in September 2014.

As well, looking back at the recessions prior to the Great Recession, we observe that in every case, the sales of new single family homes showed a very rapid recovery to pre-recession levels, within months in most cases and certainly within a year in all cases.  Here we are, five years past the official end of the Great Recession and the market for new single family homes is just above the lows seen going all the way back to 1965 and nowhere near the pre-Great Recession and pre-housing market bubble levels.

While data is showing us that in some markets, the housing market has shown resiliency and valuations have returned to pre-Great Recession levels, the lagging sales of new single family homes has had a ripple effect through the American economy, keeping hundreds of thousands of construction workers off the job as shown on this graph:

Once again, excluding the housing bubble that developed between 2003 and 2007, we see that there are roughly 620,000 fewer construction employees than there were at the end of 2002.  The economy currently has the same number of construction workers as it did back in May 1998!  As well, we can see that the employment recovery rate in the construction sector is far longer this time than in any other post-recession period going all the way back to 1939.  Without a doubt, those missing 600,000 jobs would go a long way to really lowering the unemployment rate.

The United States housing market showed some significant signs of life over the first three years after the end of the Great Recession.  Unfortunately, as we see from this data, the sales of new single family homes is definitely not one of the bright spots in the America's overall real estate picture and is showing signs of fatigue.  This data does show us two things; the Fed's easy money policies have been relatively ineffective when it comes to the building of new single family homes and the Great Recession was a unique event that has had a far longer negative impact on some key aspects of the housing market than anyone would have anticipated at the time.

1 comment:

  1. When it comes to real estate low interest rates at some point becomes a double edge sword, that effects both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment".
    Prices must rise or the income derived from a property must be large enough to offset the natural depreciation from the wear and tear from age or the main driver for owning real estate vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity.