The heady days of the housing recovery are over.
That fact was underscored this week amid the release of data from the Commerce Department on Monday showing that new home sales fell in July from the previous month, along with Case-Shiller data released Tuesday indicating that home prices fell month-over-month in June.
Thomas Simons, an economist at Jefferies, described the new home sales figures as “a little bit disappointing” to Bloomberg. “The new-home sales data have no traction whatsoever and don’t seem to be gaining at all.”
But how worried should we be about these numbers overall, and do they suggest anything concerning about the broader economy? The answer to both questions: not much.
The Case-Shiller numbers, which show that home prices declined nationally from May to June, are marred by the fact that this measurement probably over-adjusts itself for seasonal changes in home buying behavior. As Trulia Chief Economist Jed Kolko points out:
The housing crisis substantially changed the seasonal pattern of housing activity: relative to conventional home sales, which peak in summer, distressed home sales are more evenly spread throughout the year and sell at a discount. As a result, in years when distressed sales constitute a larger share of overall sales, the seasonal swings in home prices get bigger while the seasonal swings in sales volumes get smaller.
As a result, Kolko argues that Case-Shiller is adjusting price increases too much on the downside and that a better seasonal adjustment would show a slight increase in prices from May to June.
Secondly, as Jonathan Miller of real estate appraisal firm Miller Samuel has pointed out, Case-Shiller data is really tracking the housing market as it was sixth months ago, largely due to the amount of time it takes for real estate deals to close. More up to date and inclusive studies like Core Logic’s home price index show home prices continuing to rise slightly from month to month.
The New Home Sale numbers released Monday are also misleading because they don’t show the real source of America’s housing strength: multifamily housing.
US Housing Starts data by YCharts
We shouldn’t view flat home prices as necessarily “disappointing.” It doesn’t really do homeowners any good for their home to rise in value if other homes are rising in value too. We all have to live somewhere, and, all things being equal, we should hope for shelter to be cheap, not expensive. Rising home prices could be a great thing if they come as a result of a lag between an increase in demand driven by an improving economy and an increase in supply from homebuilders. But if rising home prices are simply the result of restricted supply (or, worse, a real estate bubble) they aren’t doing anybody any good.
To judge the state of the housing market, we should focus on housing starts (new home construction) and housing inventory. Both of these measures are on the rise amid steady or slightly rising home prices. This suggests that the housing market is continuing to slowly mend and reclaim its place as one of the drivers of the broader economy.