Housing: Keeps Up The Good Work

Today’s report on the sale of newly constructed homes tells us that the real estate recovery continues unabated. Sales rose 2.3% in April to an annual rate of 454,000, a number about 29% higher than this time last year. That’s not earth shattering in the context of the peaks we saw during the bubble years, but it is way better than the miserable below-300,000 rate of the trough.

There are  two primary causes of the continued recovery.

One is that interest rates remain very low, even though they have started to creep up a little in recent weeks. A thirty year fixed rate mortgage weighs in at 3.59% at the moment, making home buying a much more affordable prospect than it has been for most of the recent past.

The second cause is that new household formation continues to increase. This is not just due to ongoing population increase, but is augmented by people leaving shared housing to settle on their own. During the recession household formation fell as people lost jobs and were forced to share a home.

We also learned today that prices of new homes has hit a peak – the median price was $271,600 in April, up 15% in the last year. This increase is driven mainly by the lack of supply. Current inventories of unsold homes are equivalent to only four months of sales, which is 30% or more down on the inventories we saw back in the darkest moments of the crisis. Prices of existing homes, as opposed to newly constructed homes, are rising less rapidly, but the FHFA reports that they too are up between 6% and 7% on last year’s levels.

None of this implies that we are witnessing a re-emergence of bubble like conditions, but it does indicate solid progress and suggests that overall growth, while weaker than we would like, is still plodding along.