Who was surprised that new home sales beat Wall Street consensus estimates by a mile, turned on their heels from slippages in July and August, and put the benchmark back on solid footing to meet expectations for a better than respectable growth year in 2017?
At least a few were if you believe what you read in the Wall Street Journal account of the data release on Wednesday by staffer Laura Kusisto.
The report was greeted with widespread surprise by economists, most of whom expected modest declines in sales in September due to hurricanes in Florida and Texas.
New-home sales data can be volatile and subject to revision. The September increase, which comes with a 19 percentage point margin of error, is still likely to be revised down.
Most surprisingly, the report said that home sales in the south, which includes Florida and Texas, jumped by 25.8%. An aging population moving to warmer climes and relatively affordable home prices have helped make the south a growth market, and that might have outweighed the effect of the hurricanes.
But, if you are a regular reader of The Z Report, a twice-monthly download of data, interpretations, predictions, observations, and insights from a team of analysts at Zelman & Associates, you may not have been the least surprised by the quantum leap upward in new home sales. (You can sample a free trial of The Z Report by clicking here).
Almost a week before the U.S. Census release of its data, Zelman analysts were finishing up editing of their piece, “Irma Be Damned, Private Builder Order Growth Rebounded in September.” The report noted:
“If we exclude Houston and Florida entirely from our dataset, 3Q17 order growth would have registered 11% in 3Q17 and 12% in 2Q17, suggesting relatively steady demand at a solid level of late. In the quarter, growth was led by the West region, which was up 16% and has ranked as the fastest growing region in five of the last six quarters. “
The data support the Zelman thesis:
“When we combine relatively steady unit order trends, adjusted for hurricanes, with strong pricing power, we are left with a favorable view of end demand and believe that macro data points should return to more positive conclusions once storm effects have dissipated.”
Of course, another smart observer of housing trends barely blinked when the new Census report showed the highest one-month change in growth in home sales since 1992. National Association of Home Builders chief economist Robert Dietz chalked the September surge up to getting back on trend after a spell of volatility. Dietz notes:
September marks the fifth month in 2017 at an annual sales pace of more than 600,000. New home sales through September are running 8.6% higher than this time in 2016, in line with NAHB’s forecast.
Dietz struck a cautionary note, however, as he considered the latest price data on new home orders.
Median new home sales price (price of the home in the middle of the distribution) rose to $319,700. Average home price jumped to $385,200. Managing rising construction costs in the months ahead will be a key challenge for housing affordability, as input costs increase.
Now, the fairly recent awakening of household wage growth should continue to provide traction for continued demand, but sooner or later, builders are going to have to find ways to manage direct costs from increasing even as input price power builds.
The next stretch of the market will go far to revealing which builders’ disciplines, operational processes, and margin management skills outperform their peers. The cost challenges to all of them will be coming from multiple directions.
