Unexpectedly Intriguing!
December 4, 2014

Earlier this week, we noted that the preliminary data for both the median sale price and the average sale price of all new homes sold in the U.S. appeared to spike dramatically upward to reach all time record levels for the month of October 2014.

Today, we're digging deeper into the U.S. Census Bureau's data to get some insight into how the sales mix of the new home market in the U.S. is evolving. Here, we've calculated the twelve month trailing average of the monthly number new homes sold in the U.S. according to the price range into which they fall, which we've illustrated in our first chart.

Thousands of New Homes Sold Each Month in U.S. by Sales Price, Trailing Twelve Month Moving Average, January 2003 - October 2014

In this chart, we see that since the year-long main inflation phase of the second U.S. housing bubble ended in July 2013, U.S. new home builders have continued to increasingly turned away from producing affordable homes.

For the lowest priced homes, below $150,000, that continues a trend that resumed with the onset of the second U.S. housing bubble in July 2012. We also find that builders have also begun to reduce the number of homes in the next-highest price tier, $150,000 to $199,999, since the main inflation phase of the second U.S. housing bubble ended in July 2013.

Meanwhile, we find that the number of homes in the next higher price tier, $200,000 to $299,999 has flatlined since July 2013. And then we find that U.S. home builders have increased their monthly production of homes priced $300,000 and up.

What this means is that U.S. home builders are increasingly declining to pursue building homes that fall within the affordable reach of U.S. households. That strategic decision mirrors what happened during the first U.S. housing bubble, when a similar dynamic increasingly took hold in the new home market after May 2004, setting up what would ultimately become the deflation phase of the first U.S. housing bubble.

Our next chart stacks the data presented in the first chart to illustrate how the overall market looks.

Thousands of New Homes Sold Each Month in U.S. by Sales Price, Trailing Twelve Month Moving Average, January 2003 - October 2014 (Stacked)

In this chart, we see that the combination of the increase in the number of $300,000 and higher priced homes with the decrease in the number of new homes sold for less than $300,000 has resulted in essentially flat production rates, with essentially sluggish growth, at best, for the industry.

Our next chart visualizes the relative share of new homes sold in each of the price tiers tracked by the U.S. Census Bureau.

Share of New Homes Sold Each Month in U.S. by Sales Price, Trailing Twelve Month Moving Average, January 2003 - October 2014

As with the first U.S. housing bubble, we see that the sales mix of the current housing market has once again become considerably skewed toward the high end of the market. We see that new homes priced $300,000 or more now claim about 40% of all sales, up roughly 10% from the level recorded in July 2013.

That's quite a dramatic change in such a short period of time. In fact, this kind of change in the sales mix of new homes should be considered to be a characteristic of a bubble in the new home market. Speaking of which, we should also note that what determines if a housing bubble exists is the rate at which prices change with respect to household income - comparisons of the current price level or quantity of homes built with those recorded during previous peaks or troughs do not matter in that determination.

In our final chart, we'll show the relationship between the trailing twelve month averages of the median sale price of new homes in the U.S. against the median annual income of U.S. households.

U.S. Median New Home Sale Prices vs Median Household Income, December 2000-October 2014

In October 2014, we find that U.S. median new home sale prices have risen to be about 40% higher than what would have been considered to have been affordable for same median household income between 1987 and 1999. Or for that matter, between 1967 and 1999.

U.S. Median New Home Sale Prices vs Median Household Income, 1967-October 2014

And so, we see declining affordability in the sales mix of new homes.

Data Sources

Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 3 September 2014. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau. We are also using a novel approach to estimate the median income of U.S. households for the months of August 2014 through October 2014, since changes in the U.S. Census Bureau's survey methodology during this time have prevented Sentier Research from updating their monthly estimates of U.S. median household income.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 1 December 2014.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold by Sales Price: U.S. Total (2002-present). [PDF Document]. Accessed 1 December 2014.

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