By New Deal Democrat
Two of my best accomplishments over the 10+ years I have been blogging are calling the top of the housing bubble in real time in 2006 and in summer 2011 correctly calling for the bottom in winter 2012. In so doing, I learned a couple of very important insights: at the peak, housing prices rotted from the top (i.e., most expensive) down; at the bottom, they improved from the bottom (i.e., least expensive) up.
That’s because, as prices appreciated, buyers were able to adjust downward their expectations as to how much house they could afford. At the peak, there simply weren’t enough buyers left to afford the houses at the top end of the price range. The opposite happened at the bottom. At some point low prices became so compelling that a large number of low-end buyers were able to afford entry level houses.
In the last few years, prices of new homes have actually slightly exceeded their bubble peak prices, even adjusted for inflation, as shown in this graph of new (blue) and existing (red) home prices since 1999, although inflation-adjusted prices for existing homes remain well below their bubble peak:
As I pointed out recently, a significant driver of the surge in new home prices has been all-cash purchases by foreigners, and in particular by Chinese nationals. (CITE). I speculated that the turmoil in the Chinese stock market and economy would probably drive away many of these purchasers, and that appears to have been the case.
Here’s what CoreLogic had to say a few days ago:
“Cash sales made up 30.8% of total home sales in July 2015, down from 34.2% in July 2014. The year-over-year share has fallen each month since January 2013, and is at the lowest level in nine years. Month over month, the cash sales share fell by 0.5 percentage points in July 2015 compared with June 2015.”
And here’s a similar article from Bloomberg last week about luxury homes:
“There was a lot of turmoil on the financial markets around the world and that might have stopped people from pulling the trigger,” Cervi said. “The international buyer has been absent.”
As a result, the growth in the median sales price of new homes (blue) as well as existing homes (red) has cooled, as shown in the YoY graph (averaged quarterly to cut down on noise):
This close-up of the last year’s monthly prices shows that the peak in new home prices (blue) was 9 and 10 months ago:
Median prices for existing homes are continuing to grow slowly (red).
The confirmation of the trend is shown in this table from this morning’s new home sales report. Notice that the amount of houses sold in the lowest ranges has not declined at all from their springtime seasonal peak, while the number of more expensive houses sold in the $200k-$400k and $500k-$750k ranges have declined by roughly 50% from the 2nd quarter of this year:
As with 2005, the biggest seasonal declines in prices has been in the more expensive and moderately priced houses, and has not included the low end of the market.
Recall also that we are also still seeing the effects of the 2013 “taper tantrum,” which caused a stall in new construction in 2014, and as per the usual pattern, have shown up in prices this year.
Since interest rates have declined, and housing starts have improved this year, I anticipate there will be further price appreciation in both existing and new homes, but so long as the global slowdown continues, more pressure on higher priced new homes will also continue, causing their prices to underperform prices for existing homes.