Housing was a major drag on the U.S. economy in 2018. From 2012 to 2017, residential construction contributed about 0.24 percentage point to the annual growth rate in gross domestic product each year. Last year, however, home-building fell about 10%, subtracting 0.13 percentage point from GDP growth.
The April data on new single-family home sales, released by the Census Bureau on Thursday, suggest the worst of the housing downturn may be over.
Unsurprisingly, changes in consumer demand for new homes affects the willingness of home builders to increase supply. American purchases of new homes peaked in the middle of 2005 at an annual rate of more than 1.3 million units. Construction spending peaked about six months later, in the beginning of 2006.
By the end of 2010, home buying had slowed to an annual rate of fewer than 300,000 units and residential investment in new structures had fallen 76%. Housing demand began to recover at the end of 2011, and residential construction started to rise shortly thereafter.
By the end of 2017, single-family home sales and new building had both more than doubled. That was when the situation began to deteriorate. New-home sales fell more than 13% between the end of 2017 and the end of 2018—the biggest yearly decline since 2011. Construction spending peaked in the first quarter of 2018 and has since dropped 12%.
The good news is that home sales have rebounded strongly in the past few months and have just breached a new postcrisis high. If the situation continues, home building should rise to accommodate the increase in demand.
One important question is what will happen to mortgage interest rates. The deterioration in housing in 2018 was partly driven by a sharp increase in borrowing costs, which rose from about 4% in 2017 for a typical 30-year fixed-rate loan to nearly 5% by the end of 2018. Mortgage rates have since dropped back to 4% as the Federal Reserve adjusted its economic outlook. (The new tax law also contributed by removing most of the tax advantages of owning relative to renting.)
Another interesting feature of the recent data is the changing mix of home prices over time. The Census data on the sale prices of new homes reveal some interesting trends, even though they don’t go back that far. First, the increase in home sales during the housing bubble was entirely driven by what, at the time, constituted the high end of the market: homes priced at $300,000 or above. This segment also explains the entire recovery in the market since the trough in 2011 and the more recent slowdown in 2018.
By contrast, sales of homes priced under $300,000 have been essentially flat for 10 years, although they have increased a bit in the past few months.
The result of all this is that the median price of a new home was about 31% higher at the end of 2017 than at the previous peak at the beginning of 2007. Between 2007 and 2009, however, transaction prices fell 19%. More recently, transaction prices in the first three months of this year were about 9% lower than in the last three months of 2017. While the monthly data are much more volatile, the April number suggests home prices may have rebounded.
The data for May will be released on June 25.
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