Dec. New Home Sales Expected to Fall 1.8 Percent
Zillow expects new home sales to fall 1.8 percent to 430,000 units (SAAR) in December.
- The combination of falling interest rates and modest improvements in mortgage credit availability should not be enough to offset the effects of a rising homeowner vacancy rate and a still-falling homeownership rate during the third quarter for new home sales.
- The decrease in new home sales over the last two months, along with changes in single family housing starts this past spring and summer, are both expected to positively contribute to new home sales this month.
Zillow expects Wednesday’s new home sales data from the U.S. Census Bureau to show a decrease of about 1.8 percent to a seasonally adjusted annual rate (SAAR) of 430,000 units in December, down from 438,000 units (SAAR) in November.
Background
2014 was a mixed year for new home sales, which fluctuated around an average of 432,000 units (SAAR) and are expected to finish the year below their January level of 457,000 units (SAAR). Sales reached their highest level of 458,000 units (SAAR) in May and managed to avoid their 2013 low of 367,000 units (SAAR), only dipping below 400,000 units (SAAR) once.
Sales were boosted by falling interest rates throughout the year, where the 30-year mortgage fixed interest rate fell from about 4.4 percent to 3.9 percent. Also lending a helping hand to sales were the continued downward trend in the percent of loans in foreclosure, reaching 2.4 percent as of September. Fewer foreclosures means fewer foreclosure resales. Since some buyers view foreclosure resales as a substitute for new homes, declining foreclosures should imply higher demand for new homes.
However, the homeownership rate and homeowner vacancy rate likely tempered those positive movements. The homeownership rate fell slightly by 0.75 percentage points, by our estimates. The homeowner vacancy rate trended down for the first half of the year, but reversed course during the third quarter but still remaining below its January level as of September. Overall, the underlying fundamentals of the housing market remained relatively stable throughout 2014.
Forecast
Our new home sales forecast uses a best-fit combination of two models, a structural model and a historical model. This month the models are suggesting movements in opposite directions. The structural model suggests a decrease in sales, while the historical model suggests a slight increase.
The information obtained from the structural model suggests a decrease in new home sales of 3.9 percent to 421,000 units (SAAR). Unlike existing home sales, the combination of falling interest rates, declining percent of loans in foreclosure, and a relatively low level of financial stress suggested by the Kansas City Federal Reserve Financial Stress Index should not be enough to offset the effects of a rising homeowner vacancy rate and falling homeownership rate experienced during the third quarter.
The historical model, however, suggests a slight increase in new home sales of 0.7 percent to 441,000 units (SAAR). Changes in single family housing starts over the period April to August, specifically the increase in July, are expected to outweigh the effects of decreasing new home sales over the last three months, resulting in a positive correction in sales for December.
Using a best-fit combination of the two models to extract as much information as possible, we obtain a point forecast of 430,000 units (SAAR), a decrease of about 1.8 percent from November.
More details about the methodology for this month’s forecast can be found here.
