New Home Sales, Home Prices Slow

August 27, 2014Marketsby economywatch@iadvantage.com

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 Less Americans are buying new homes as the prices of those homes become unaffordable, according to new data from the Department of Commerce and the U.S. Bureau of Labor Statistics.

While salaries are beginning to see modest rises of roughly 2% growth on a year-over-year basis, home prices have risen much faster in a shorter period of time, but those home prices are beginning to stagnate as demand falls for homes amidst tight credit and diminishing affordability in the housing market.

New Home Sales Fall

New home sales slowed in July to their lowest pace since winter, when the nation’s GDP contracted 2.9% on extremely cold weather. Despite a warmer climate, new homes are selling slower, with purchases declining 2.4% to an annualized rate of 412,000 units, according to the Commerce Department.

While income gains have remained modest, some analysts expected loosening credit standards to help new home sales. However, some analysts are beginning to weigh whether American consumers are simply too tapped out to afford the loosening credit without an expansion of higher risk subprime loans.

Home supplies have reached a steady equilibrium as the seasonally adjusted estimate of new houses for sale at the end of July was 205,000. This represents a supply of 6.0 months at the current sales rate.

Home Price Growth Decelerates

Home price growth, which was in the double digits in April, has fallen to less than 9% in recent months and is continuing to slow. The S&P/Case-Shiller Home Price Index has shown a steady decline in yearly price growth for every month of 2014, after peaking in December last year.

While home prices have risen in recent years thanks to record low interest rates, steadily growing demand, and lackluster supply, home prices have begun to see growth taper as costs hit the ceiling of what most Americans can afford.

According to the Census Bureau, the median sales price of new houses sold in July 2014 was $269,800; the average sales price was $339,100. Since the median household income in the U.S. is $53,891, the median new home costs 5x the median American’s household income. Historically, that ratio has been almost half as much most of the time.

Low Wage Growth, Price Ceilings

Falling home price growth may be tied to stagnant wage growth in the U.S., which Federal Reserve economists say may be facing deflationary pressures as slack in the labor market continues to linger.

In her speech at Jackson Hole, Janet Yellen said that the Federal Reserve will increasingly look at additional indicators beyond the unemployment rate, such as wages, labor participation, and job openings. According to Yellen, “the labor market has yet to fully recover.”

Real wage growth has fallen from over 3% before the global financial crisis to less than 2% for most of the past five years, although hourly earnings rose 2% on average in July over the prior year.

Wages are not rising more for public employees, either. According to the employment cost index, civilian workers saw 2% pay increases in the 12-month period ending June 2014, identical to private industry workers for the same period. However, benefits rose 2.5% for civilian workers and 3.2% for state and local government workers, compared to 2.4% for private employees.

So-called “blue collar” workers in natural resources, construction, and maintenance occupations saw higher wage growth of 2.4% in the same period, compared to 1.1% growth for service occupations.

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