Unexpectedly Intriguing!
April 29, 2014

After falling in February 2014 for the first time since June 2012, the initial median new home sale price in the U.S. reported for March 2014 increased by the largest percentage ever recorded since the U.S. Census Bureau began tracking this data back in January 1963. To put numbers to that achievement, the median new home sales price increased by 11.2% from February 2014's revised figure of $260,900 to March 2014's initial figure of $290,000.

At the same time, the preliminary estimate of 384,000 new home sales for March 2014 was significantly lower than the 449,000 recorded in February 2014.

Our chart below puts the trailing twelve month average of median new home sale prices into context with respect to median household income in the U.S., which allows us to account for annual seasonality in the housing data while also smoothing out the volatility of the median income data.

U.S. Median Trailing Twelve Month Average of New Home Sale Prices vs Median Household Income, December 2000 through March 2014

So why did the month-over-month median sale prices of new homes rise so much while the number of new home sales fell by so much?

The answer has a lot to do with the distortionary effects of the second U.S. housing bubble. One of the defining characteristics of a housing bubble is the effect that it has on the sales mix of new homes being sold. Here, as a housing bubble matures, builders come to pursue a strategy of trying to maximize their profits by producing an increasing share of new homes at higher and higher sale prices. Our chart below shows how distorted the mix of new homes being produced and sold has become:

New Home Sales Mix for Trailing Twelve Month Average of Thousands of New Home Sale Prices January 2003 through March 2014

But that strategy risks throwing the market into extreme volatility as the supply of more affordable homes becomes depleted. In this case, that portion of the available supply was effectively depleted in February 2014, leaving behind a large pool of much higher priced homes that were still on the market in March. Homes that were priced well above the affordable reach of typical U.S. home buyers, which is why the number of sales fell so dramatically from the previous month and also why their median sale price increased so dramatically from the previous month for the sales that did occur.

It is then the mismatch between the sales mix of the new homes available for sale and the household income of the potential pool of home buyers is what caused the number of new home sales to plummet in March 2014 as their median sale price skyrocketed. Just the same as what happened during the deflation phase of the first U.S. housing bubble as it picked up speed in the months following the sales volume peak recorded in January 2006.

Trailing Twelve Month Average of Thousands of New Home Sale Prices January 2003 through March 2014

Consequently, what we're seeing the in data today is consistent with the second U.S. housing bubble peaking as it enters its own deflation phase.

Elsewhere on the Interwebs

Barry Ritholtz answers the question of Where Are All the Homebuyers? Be sure to follow the links at the bottom of Barry's article that pick up on other aspects affecting the U.S. housing market.

The WSJ's Nick Timiraos reports on Why Home Price Gains Aren't Lifting the Economy.

Data Sources

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 23 April 2014.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold by Sales Price: U.S. Total (2002-present). [PDF Document]. Accessed 28 April 2014.

Sentier Research. Household Income Trends: March 2014. [PDF Document]. Accessed 28 April 2014. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars.]

Labels:

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.