March new home sales scorch expectations.
A 12.2% gain (1.431M units) blew past the expected 2.8% drop in home sales. Fence sitters fearing higher rates, improving weather, continued affordability, and maybe a bit of speculation shot units higher. New home sales are calculated a bit differently from existing home sales; they are booked when the contract is signed whereas existing home sales are booked at closing. Thus there can always be some flex in the number if some contracts are walked, but unless the market collapses that is rare.
Very strong, but it is another example of volatility in the housing market results the past several months that have seen big ups and big downs. That is always a sign of change in an existing trend. With the current demographics, it does not suggest a collapse anytime soon. As we have said the market will most likely continue to flatten in a broad peak and then decline gradually to lower levels.
Why not a big collapse? Because that takes a lot of speculation, and it is not apparent in this market. Over the past three years we have watched the market in many areas and saw what looked to be the start of speculation. In Galveston, Texas just over a year ago we noted that there were many purchases of second homes were made with the idea that they could be immediately sold for a gain if necessary. That is a sign of speculation, though not rampant speculation. In the following year the market remained strong, but the past three months it has slowed considerably with some high dollar houses sitting empty, looking for a buyer. The market has hardly collapsed; it is just taking longer to sell where before they were often sold before completion.
In Los Gatos, CA and the hinterlands thereof the housing market was very strong in the late 1990’s, but then suffered the slump after the high tech bust. No surprise there. Many homes that were under contract were walked while others just got by with the closing. Now that area is enjoying a strong market once more. A house that sold for $1.5M in 2002 just sold the other day for almost $2.5M. That market has seen boom, bust, and now resurgence.
We keep hearing talk about speculation in the market, and there are people buying houses with the specific intent to sell them for a profit. Is that investment or speculation? In some minds that is automatic speculation; to others it is simply investing in a good market. The key is, as with all indicators, when it gets extreme. Has it become a serious alternative to other forms of investment? Not many have the understanding and patience to go through the closing process, market a property, and then go through closing. It is done, but it is not something that everyone can just switch to as opposed to investing in stocks or commodities.
Another consideration is whether it is raw land, new houses, or ‘fixer-uppers.’ In Austin, Texas back in the mid-1980’s there was a real speculative bubble in real estate. It got extreme when the speculators moved from buying and selling houses to buying and ‘flipping’ raw land to Californians and others from out of state. Land would ‘flip’ 5 or 6 times in rapid succession, the price rising with each transaction with nothing being done to the land at all other than new ‘for sale’ signs being put up (sometimes). Shortly thereafter the market crashed in the great real estate bust and S&L collapse. That land remained the domain of rattlesnakes, scorpions, and dwindling horned toads until the resurgence the past 7 years as Austin became more of a silicon destination and again attracted outside dollars. Those lands are now developed and more development continues. Still, it is not the frenzy it was back in the 1980’s.
What we are seeing in many areas are cycles within the overall cycle much as we cycles within the overall economy. During an expansion there are periods of rapid growth and there are periods of slower, sometimes flat, growth. All the while the trend remains in place. Even with the tech crash of the early 2000’s, we see real estate in San Francisco and the Silicon Valley hinterlands resurging. It survived a crash and is still moving back up. That is the power of low interest rates, demographics that support strong buying (boomer second homes and low end houses for immigrants) and a redirected outlook toward the home after 9-11. Yes Americans are traveling once again, but 9-11 altered attitudes and priorities as to what is important. It is not always overt, but it is there. They buy beach or mountain houses as their main getaways.
There may be a day of reckoning ahead when low variable rate mortgages suffer rate spikes, but what we are hearing from most mortgage brokers is that those entering the market that need to get over the threshold are using the adjustable mortgages to get into the home and then moving into a fixed rate note. Not all, but that is what many are wisely doing. Despite most pundits who grew up with an overly strong federal government and thus, like the federal government, look upon most of us citizens as ignorant sheep, US citizens are smart and end up making good economic decisions. How else do we get the amazing productivity and economic growth we get compared to the rest of the world? It is not by sitting on our butts watching the world go by. Over 70% of the businesses in the US are small businesses. You don’t have that with a population of mouth breathers. Thus there will be a continued slowdown in the housing market as the demographics shift from the current favorable environment, but without a major economic collapse in the rest of the economy as well, the market is not at a speculative crescendo and ready to tank.
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