New Home Sales Explode Higher Thanks To... Record High Average New Home Prices?

New Home Sales rose a magnificent (seasonally-adjusted annualized rate) 18% in August - the biggest monthly rise since January 1992 albeit with a 16.3 90% confidence interval, meaning the final number may well be +1.7%. At 504k, new home sales are back at May 2008 levels (though obviously massively below the 1.4 million homes sold at the peak in 2005). As a reminder, May's 504K new home sales print was later revised later to 458K. But even more stunning, new home sales in The West rose a mind-numbing 50% in August (and up 84.4% YoY - nearly double).

And just to confuse matters, the average new home sale price rose to a new record high of $347,900. So as existing home sales are sliding (and prices dropping), new home sales are surging (to new record highs) - makes perfect sense. We await the extrapolations for how great this move is. (or the realization that it is entirely seasonal-adjustment-biased and unsustainable given the realities of mortgage applications).

New home sales rose the most since 1992:


But only back to late 2008 levels


As new home prices rip to record highs;


Which, even more paradoxically, happens as housing expert Trulia admits the US is building too many single family homes. To wit:

Are We Building Too Many Single-Family Homes?

What? Too much new single-family construction? It sounds hard to believe, with only 618,000 single-family housing starts in 2013, heading toward 622,000 in 2014 – far below the pre-bubble average of 1.1 million per year in the 1990s. Even when adding in multi-unit building, which is booming, construction remains a laggard in the housing recovery and is contributing less than it should to employment and economic growth.

Of course, the historical norm doesn’t tell us what the just-right level of construction is now. That depends on the rate at which new households are formed. If new construction runs ahead of household formation, more homes sit empty and the vacancy rate rises. In 2004 and 2005, during the bubble, construction of single-family homes soared to over 1.5 million units. Then, during the bust, household formation slowed, in part because more young people lived with parents. Too much housing and too few households were a dangerous cocktail during the housing bust and recession, causing the vacancy rate to climb until 2010. Since then, the vacancy rate has fallen, but single-family construction has continued to wallow near all-time lows.

Newly released data from the Census Bureau’s American Community Survey (ACS) show that the vacancy rate for single-family homes actually ticked up a bit in 2013. That’s a big surprise. It suggests even today’s low level of single-family construction might still be too much, too soon. To determine whether we’re building too many homes, we need first to understand household formation, and then the vacancy rate.

Single-Family Rentals Increased Despite Low Household Formation Rate
To understand what’s happening with vacancy rates, let’s start by looking at changes in households and housing units in the past year broken down by owner-occupied and rented, and single-family and multi-unit:

Type of unit Change, 2012 to 2013, ‘000s Change, 2012 to 2013, % Change, 2006 to 2013, ‘000s Change, 2006 to 2013, %
Owner-occupied single-family -184 -0.3% -428 -0.7%
Renter-occupied single-family 331 2.3% 3540 31.2%
Owner-occupied multi-unit (i.e. condos) 18 0.5% -269 -6.4%
Renter-occupied multi-unit (i.e. apartments) 263 1.0% 2259 9.7%
Total single-family units, incl. vacant 226 0.3% 4701 5.5%
Total multi-family units, incl. vacant 199 0.6% 2131 6.5%
Total housing units, incl. vacant 356 0.3% 6496 5.1%
Total households 321 0.3% 4674 4.2%
Note: total housing units and total households include mobile homes, boats, RV’s, vans, etc. and their occupants.

 Since the bubble, including in the most recent year from 2012 to 2013, the largest increase of any household type was for single-family rentals. In contrast, the number of single-family homes occupied by owners declined in absolute terms, not just as a share of households, both in the past year and since the bubble.

Strikingly, household formation — the year-to-year change in total households — was a meager 321,000 between 2012 and 2013. That’s way below the 1.2 million household formation rate we’d expect given the growth in the adult population. (A separate estimate of household formation from other Census data released this week was similarly low.) Low household formation means less demand for new construction.

Multi-Unit Vacancies Down, But Single-Family Vacancies Up
The vacancy rates help us see whether construction is falling behind, keeping up with, or running too far ahead of household formation. For any housing type, the vacancy rate equals the percentage of units that are unoccupied. Unlike the “renter vacancy rate” and “homeowner vacancy rate” reported by the Census Bureau, our vacancy measure for each type — single-family and multi-unit — includes vacant homes held off the market, which is essential for understanding today’s housing market. If you ignore vacant homes held off the market, it looks like there’s a shortage of homes — but in fact there’s only an inventory shortage, not a national housing shortage. (See note.)

The multi-unit vacancy rate peaked at 17.2% in 2010 and has dropped steadily since then to 15.1% in 2013. Multi-unit buildings are leading the construction recovery, but demand for apartment rentals has been so strong that the multi-unit housing stock is filling up. Thus, the multi-unit vacancy rate has fallen, returning in 2013 almost to its 2005 level. That rate might start to level off as apartment buildings broke ground in 2013 reach completion in 2014 and add to the housing supply.


The single-family market tells a very different story. Even though single-family construction remains depressed compared with historical norms, the single-family vacancy rate is still high. It was 10.7% in 2013, ticking up from 10.6% in 2012, and close to its peak of 11.0% in 2011. That compares with 7.4% in the pre-bubble days of 2000.


For the single-family vacancy rate to move back down to bubble or pre-bubble levels, the growth in households occupying single-family homes needs to exceed the growth in the single-family housing stock. In other words, to get back to normal, we gotta fill up homes faster than we build them. That didn’t happen in 2013. Even though relatively few single-family homes were built, even fewer were filled, despite the increase in single-family rentals.

It’s worth noting that it matters where the vacant homes are. A high vacancy rate might not imply less need for construction provided that the vacancy rate is low in areas with strong population growth and housing demand. But that’s in theory. In fact, it turns out that it isn’t only economically struggling areas that have stubbornly high single-family vacancy rates. Many faster growing metros overbuilt during the bubble still have lots of vacant homes.

Wrapping up: Even though single-family construction is low by historical standards, it may still be running ahead of demand. If anything, we built slightly more single-family homes in 2013 than we filled. And on the flip side, apartments and condos are being snapped up, even though multi-unit construction has been chugging ahead of normal levels. For the housing market to get back in balance, multi-unit must continue to lead the construction recovery.