Real estate markets continued the blistering pace of new home sales in June, according to Census Bureau estimates. Year-over-year, seasonally adjusted growth was 38.1% to an annual rate of 497,000; the highest level since May 2008. On an unadjusted basis, there were 48,000 new homes sold in the US in June, up 41% Y/Y.

In the wider historical context, the rate of new sales is just approaching the lower end of the historical range, but it’s the pace at which this is occurring that is “bubbly”.

ABOOK July 2013 New Home Sales

The last time the growth in the sales rate was similar (and sustained) was the early 1980’s after mortgage rates were falling from 20% and the early 1990’s rebound from the collapse of the mortgage markets due to the S&L crisis. The current 6-month average growth in sales of 29.2% is far above any pace seen during the whole of the housing bubble – the highest 6-month average rate during the housing bubble was just above 18% in May 2004 (mania phase) and May 1996.

Even in the mania phase, the “best” sales pace was fourteen consecutive months at a double digit Y/Y rate. Currently, we have seen seventeen consecutive months of double-digit Y/Y growth and twelve consecutive months over 20%!

The counter to that observation, or at least an attempt at explanation and rationalization, is that this is a robust rebound from an absolute collapse, therefore these types of growth rates are to be expected. That might be more persuasive if other factors conformed to that interpretation, but we know that, for example, pricing is rebounding much like the sales pace. That is important because now the systemic price of real estate is being set by far fewer transactions, and thus may not at all be representative of the full state of the real estate “market”; market prices are sustainable only if they can hold up to the a sustained selling impulse. If there aren’t enough buyers to absorb a rapid supply increase, prices quickly reverse and that, coming in this housing context, would be extremely damaging.

ABOOK July 2013 New Home Sales Prices New and Old

Like stocks, median home prices, both new and existing, are at records that are being created by a fraction of the transactions seen during the bubble periods. And also like the pace of sales, prices had been appreciating faster than during even the mania phase of 2003-06.

A curiosity to note alongside this data was a reported drop in the median sales price of new homes, making it two consecutive months of greater than 5% declines. While this occurred concurrent to the “taper” effects on mortgage apps and rates, it’s not clear if that is driving the decline. If it is at all real and not just volatility in the underlying data collection and statistics, then it might explain the rapid acceleration in sales – lower prices should mean more activity.

ABOOK July 2013 New Home Sales Prices NewABOOK July 2013 New Home Sales Prices New Chng Avg

But it also conflicts with pricing data from the NAR released earlier this week. The scale of the decline is also noteworthy, representing the largest two-month decline since early 2011. One possibility that would conform to the construction data we are now seeing is that home builders are back to discounting properties to get them moving. This might also be relevant given that rising new home prices eventually might equalize with existing home costs leftover from the previous bubble – factoring in renovation and other carrying costs. At some point, if new homes get expensive enough, buyers can switch to existing homes including the costs of upgrades and fixes. Price sensitivities and substitutes are certainly factors, particularly given the still major overhang of shadow supply.

Once again, given the volatility in the data, it is hard to draw any solid conclusions from all of this. In my opinion, despite the scale here, the pace of both activity and pricing are consistent with an asset bubble and this, plus the reach for yield in junk and REO-to-rent, has the FOMC worried. I don’t believe these kinds of moves are sustainable, though it is far too early to say if the pricing change is a new trend or just expected volatility. Given the economic fundamentals here, it is a dangerous monetary game, but manias have a way of exceeding every expectation, even mini-mania.

 

Click here to sign up for our free weekly e-newsletter.

“Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@4kb.d43.myftpupload.com or 561-686-6844 . You can also book an appointment for a free, no-obligation consultation using our contact form.