The U.S. housing market is the most robust it has been in several years while strength has been particularly apparent in the new home segment. Higher levels of new home sales, increased activity in residential construction, rising prices for homebuilder stocks, and higher premiums for new homes all back the notion that the new home market is on fire.
New home sales volume during the first three months of the year is the highest it has been since 2008. New home sales in March rose to a seasonally- adjusted annual rate of 411,000 units. Sales for the previous three-month period were also revised higher by 23,000 units.
Total residential housing starts in March surpassed the 1 million unit mark for the first time since June 2008. Total starts increased 7% from the previous month to a seasonally adjusted annual rate of 1,036,000 units.
Homebuilder stocks are surging. The SPDR S&P Homebuilder Exchange Traded Fund (XHB) is trading at its highest levels since July 2007. Earnings for some of the largest homebuilders in the U.S. have been beating Wall St. estimates and showing impressive year-over-year growth.
IPO market for homebuilders is back. There have been two successful initial public offerings in this space so far this year, Taylor Morrison (TMHC) and Tri Pointe (TPH), while a third is on the way with William Lyon Homes recently filing to go public.
The premium for new homes over existing homes was at 34% in March and has averaged 38% over the past year. Compare this to the five-year average of 30%, 10-year average of 20%, and all-time average of 21% and you can see that more demand for new homes is resulting in a larger price premium.
Demand outpaces supply in the market right now. There are only 4.4 months of new home supply currently on the market. This is near an eight-year low and significantly below its historical average.
Rising costs for building materials are also contributing to the increase in new home prices. The fact that builders are able to pass on these costs to homebuyers and maintain elevated levels of demand is a positive sign for the housing market.
In fact, the overall housing market has been performing so well that some have even started to suggest another housing bubble may be forming. There is no doubt that housing is currently experiencing impressive growth, but the difference this time around is that it is being driven by stronger fundamentals. Yes, artificially low mortgage rates are definitely one of the driving stimuli to the housing rebound. But more importantly, so is the quality of the home purchases being made. Buyers during the bubble were over-leveraged. Buyers today are qualifying for loans in a considerably more rigorous lending environment and are also required to put up more money for down payment. Many more are paying cash entirely. For example, cash purchases for homes in California reached an all-time record high in 2012.

Continued momentum in housing will be dependent upon two things—job growth and the Fed. Following a disappointing March, April employment figures came in higher than expectations. Total non-farm employment increased by 165,000 payrolls last month while the dismal March numbers were revised higher by 50,000 jobs. Payroll growth in February was also revised higher by 64,000 jobs. This helped the nation’s jobless rate decline to 7.5% which is the lowest it has been since December 2008. The Federal Reserve plans to continue to push its cheap money policy for the foreseeable future. The Federal Open Market Committee concluded after their meeting last Wednesday that inflation is still running below target and they will leave their target Fed funds rate at the 0-0.25% range and continue to purchase $85 billion worth of bonds each month. So for now, these factors suggest that the housing recovery will roll on.

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Meyers Research, a Kennedy Wilson Company, is a premier consulting practice for the residential industry, providing a national perspective as well as local expertise to homebuilders, multifamily developers and financial institutions. The company is based in Rancho Santa Fe, CA with a team of 20 employees. To learn more about Meyers Research, please visit www.meyersllc.com.