New home sales for April came in at a much greater-than-anticipated change of 16.6% where an increase of 2.4% was expected. This is the biggest increase since January 1992’s increase of 21.1%. The level of sales was also revised upward for February. The annual rate of change accelerated to 23.8% from 5.5% in March. The level of sales rose to 619,000 from 531,000 in March—the highest since December 2007 (the peak of the last economic cycle).
Regionally, the pattern of new home sales was as follows: up 52.8% in the Northeast, up 18.8% in the West, 15.8% in the South, and down by 4.8% in the Midwest. The number of months’ supply of new homes fell back to 4.7 months (lowest since February 2015).
The rate of change in new homes sales through the first quarter is now no longer quite as poor as it had seemed at first, following the upward revision to February’s data. The decline was strange given the warmer weather, the strength in the employment situation, the low level of interest rates, and the improvement in consumer’s incomes. Furthermore, sales of existing homes, had been fairly solid, rising by 5.7% in March and 1.7% in April. The sharp increase this month probably is the result of some pent-up demand being satiated. Part of the reason for the disparity and choppiness possibly relates to the fact that more recent regulations have increased the costs associated with obtaining new building permits, which has meant delays and, in turn, raised the cost of new builds relative to that for an existing home—something the homebuilders have been complaining about. This had resulted in a widening gap in the inventory levels between existing homes and new homes; however, following today’s report, this gap has now effectively closed. The reality is that demand for housing seems to be holding up quite well: the National Association of Homebuilders report that supply still seems to be the bigger constraint on home building (lack of available lots upon which to build) as opposed to demand, which they believe is reasonably solid. This also seems to be evident in the mortgage applications purchase index, which continues to shoot upward. While we still do not expect the housing sector to return to the pace of sales experienced pre-crisis, we do believe that it can continue its slow steady ascent. As far as a data-dependent Fed is concerned, this would give more weight to the FOMC’s hawks.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.