Unexpectedly Intriguing!
December 23, 2014

Having started December 2014 seeing something really weird for new home prices in October 2014, we anticipated that the record prices that were initially recorded for the month would be revised considerably downward.

And so they were! The median new home sale price for October 2014 was revised downward by nearly 5%, from $305,000 to $290,100, while the average new home sale price was revised downward by 6.5%, from $401,100 to $375,200.

These figures will continue to be revised over the next two months as the U.S. Census Bureau accumulates more sales data for the month.

Meanwhile, we find that the overall trend for median new home sale prices has continued to increase in 2014, doing so at an average pace of $9.77 for every $1 that median household income increases.

U.S. Median New Home Sale Prices vs Median Household Income, December 2000 through November 2014

This pace of growth is anywhere from 2-3 times the typical pace that was seen in the period from 1967 through 1999, or in the initial post-housing bubble crash recovery period from January 2011 through June 2012.

It is also considerably less than the rate of increase that was recorded during the primary inflation phases of the first and second U.S. housing bubbles, where median new home sale prices were rising at a rate of $21 to $25 for each $1 that median household income was increasing during those periods.

Our second chart below shows the longer term picture for the escalation of median new home sale prices in the U.S. since 1967.

U.S. Median New Home Sale Prices vs Median Household Income, 1967 through November 2014

We think that the big thing to watch for in 2015 is the re-emergence of the affordable home portion of the new home market. Since investors sparked the second U.S. housing bubble in July 2012, new home prices have largely escalated as U.S. home builders deliberately neglected this portion of the housing market, focusing instead on building premium homes, which they then attempt to sell for premium prices.

But that is a thin portion of the market that is getting thinner. Builders who have already begun adopting a strategy of building more affordable homes are being rewarded with higher volumes of sales.

“The mood of the industry heading into next year is extremely cautious,” said John Burns, CEO of his namesake firm based in Irvine, Calif. “Nothing has happened to cause sales to slow this much. But prices rose so fast in 2013, so that’s probably the primary culprit....”

This year has shaped up to be a giant stall for the new-home market, as sales through the first 10 months mustered only a 1% increase from the same period a year ago....

Some builders, however, are seeing signs of more activity from buyers. While many national builders reported lackluster results for their recent quarters, D.R. Horton Inc. posted a 38% gain by focusing on lower-priced homes and using more sales incentives to coax buyers into deals.

Paradoxically then, we would see business improve for new home builders as the median and average prices of the homes they build fall as they change up their sales mix to be more affordable for new home buyers.


Sentier Research. Household Income Trends: July 2014. [PDF Document]. Accessed 23 December 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.]

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

Previously on Political Calculations

We were among the first to declare that a second housing bubble was forming in the U.S. economy, and we were the first to back it up with an objective framework of analysis and data. Our ongoing analysis is chronicled below....


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