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.

A Different Perspective on the Sales of New Single Family Homes

New home sales in the United States look like they are on a tear, at least compared to levels from early 2010.  Here is a graph from FRED showing how sales data for new single family homes has improved since just after the end of the last recession:

Sales are up from their post-Great Recession low of 270,000 in February 2011 to August 2013's level of 421,000, a rather stellar overall increase of 57.4 percent in just two and a half short years. The annual level of 354,000 seen in September 2013 is also far from healthy despite the month-over-month gain of 25.4 percent.

Here is a graph over the same time period showing the year-over-year percentage increase in sales:

After sales fell by a whopping 32.5 percent in August 2010, the low point in sales "growth", they rose to their post-Great Recession year-over-year high of 35.6 percent in February 2012, a complete turn around.  Since then, however, things have started to slip a wee bit with year-over-year sales rising by only 5.7 percent in July 2013, hardly a stellar performance.

Now, as I am prone to do, let's put all of this into historical perspective.  Here is a graph showing new home sales all the way back to 1963:

With all of the data in mind, you can see how the current residential real estate market in the United States can hardly be termed "healthy".  Ignoring the rather anomalous rise in sales between the years 2000 and 2006 (aka the housing bubble), it is clear that the number of new single family home sales is still extremely depressed.  In fact, July's sales level of 390,000 homes was the 74th worst month on record out of all 608 monthly data points since January 1963.  To show you just how bad the housing market was during 2009 - 2011, of the 608 monthly data points, the top 22 worst months for new single family home sales were found during that timeframe.  As well, at the beginning of 1963 when the population of the United States was only 188 million compared to today's 317 million, 591,000 new homes were sold on an annual basis, 170,000 more homes than were sold in August 2013.

You will also notice that this period of depressed new home sales has been the longest on record.  The "valley" in new home sales has lasted from November 2008 to the present, nearly a full five year period.  Even during the relatively painful recession of 1980 - 1981, the depression in housing sales lasted only from April 1981 to October 1982, a period of only 18 months.

In closing, keeping in mind that the Federal Reserve has made "heroic efforts" to resuscitate the U.S. economy and recreate the wealth effect that is associated with owning a home, it is interesting to note that the impact of their experiment on the sales levels of new single family homes market has been minimal at best.  It is also important to note that, while the nodding heads will tout the improved sales numbers as a sign that the housing market has turned around, historically speaking, America's housing market is still not even close to healthy.