New home sales drop in December

By Sarah Foster
Medill Reports

Americans purchased fewer homes than expected last month, but economists are still pointing to 2017 as a healthy year for the housing market.

December sales of newly built single-family homes plunged 9.3 percent to a seasonally adjusted rate of 625,000, the sharpest decline since August 2016, according to a report released Thursday by the Department of Commerce. New home sales in November were revised from a seasonally adjusted rate of 733,000 to 689,000 but remained the strongest on record in 11 years.

Despite the sharp decline, new home sales in December were still up 14.1 percent from a year ago. In the full year 2017 sales rose 8.4 percent from the previous year and have climbed 50 percent since 2012, according to the report.

Chart: New home sales drop in December

Despite the drop, jumping to negative conclusions about the housing market is problematic, as information is revised in subsequent reports, said Aaron Terrazas, senior economist at Zillow Research, the economics arm of online rental marketplace Zillow Inc.

“These numbers are volatile, and they do move around a lot,” Terrezas said. “Looking at movement from one month to another month doesn’t tell us a whole lot.”

Explanations, he said, could come from the longer holiday season. Because both Christmas Day and New Year’s Day landed on Mondays, people often took two full weeks off work.

“During the holiday, there’s not that much sales activity,” he said.

People often assume that colder weather impacts buying habits, but this is problematic because numbers are seasonally adjusted, said John McDonald, professor emeritus in the Department of Economics at the University of Illinois at Chicago. McDonald said he’d rather look toward mortgage interest rates, anticipated to increase in December, according to an article in The New York Times.

“Sales are sensitive to interest rates and expectations of interest rates,” McDonald said. “November is an outlier. That increase might have been in anticipation of the Federal Reserve raising interest rates, people saying, ‘Let’s go buy our house now. Who knows what it’s going to do in December?’”

McDonald said price index is also a strong indicator of purchasing habits, but the latest release defined rates in October. This points to the fact that it’s still too soon to identify housing market trends based on these month-to-month reports, McDonald said.

“The demographics of the housing market don’t change in 30 days,” McDonald said. “December seems to be consistent with prior months. The outlier is really November. The year showed a modest upward trend with some fluctuations around the trend.”

The median sales price of newly built homes in December 2017 was $335,400. The seasonally adjusted estimate of new houses for sale at the end of December was 295,000. At last month’s sales rate, it would take nearly half a year for these remaining new homes to be cleared off the market. Nearly 32 percent of these homes, however, are buildings for which construction has not yet started.

To Terrazas, these figures represent the broader housing market trends that he’ll be watching in the year ahead.

“The new housing market has been relatively slow to recover compared to the existing housing market,” he said. “Builders who survived the last recession survived because they were relatively cautious and conservative, unwilling to take the crazy risks that put many of their colleagues out of business. It’s important that they’re selling more homes before they’re finished. It reflects that risk conversion.”

The Department of Commerce collects statistics through sample surveys that quantify the number of permits issued to new, privately owned buildings. New home sales make up a small portion of the housing market, the majority being sales of existing homes.

Existing home sales also dropped in December, by 3.6 percent to a seasonally adjusted annual rate of 5.6 million, the National Association of Realtors reported Wednesday. Sales for the year, however, were the highest on record since 2006.

These releases are extremely important, McDonald said, because the housing market can indicate the state of the economy as a whole.

“During the financial crisis of 2008, the downturn in the economy was really led by the collapse of the housing market,” he said. “The housing market is very important. This survey is a partial look at it, but important nonetheless.”

Photo at top:  A home for sale in Montana. New home sales dropped by 9.3 percent in December, the sharpest decrease since August 2016. (Matthew Hoelscher/CREATIVE COMMONS)