The equity market’s quick sprint out of the gate since the New Year seems to have tripped over a rock and new home sales seem to be on the same downward path. The beginning of January experienced positive growth in the markets and upbeat predictions surrounding the economy. However, in the past week, events and expectations have shifted in the opposite direction quickly. Since the beginning of the year, the Dow Jones Industrial Average has plunged 4.39 percent and the S&P 500 has sunk by 2.93 percent, as of the end of January.
This past Wednesday, the Federal Reserve announced a further cut back on its stimulus efforts by another $10 billion dollars, sighting the economy looks strong enough to expand on its own. This lack of availability of liquidity to the emerging markets is taking a toll on their respective currencies, resulting in a flight to quality for most investors. These larger macro-economic events are spilling over into housing and affecting U.S. consumers that are in the market to purchase a house.
New home sales have continued to deteriorate considerably over the last few months due to tight credit qualifications and upward pressure on prices. Traditionally the new home sales market has been composed of 40 percent first time home buyers and 10 percent cash investors. This composition has evolved now to 27 percent first time home buyers and 30 percent cash. As new home prices increase, this inevitably knocks lower income consumers out of the market while catering to those on the high-end.
The FHA product that many first time home buyers utilize has become more expensive, further keeping first time home buyers out of the market. Qualifications have also become more rigorous. Mark Hanson, a California-based housing analyst commented, “In reality, new home sales to me is simply the best gauge of ‘end-user’ demand, which of course is hugely important. But the persistent divergence between new sales and existing highlight just how powerful the ‘transitory’ investor trade has actually been.”
Recently reported new home sales in December fell more than expected, dropping 7 percent to a seasonally adjusted annual rate of 414,000 units. Additionally, November’s new home sales were revised down by 19,000 units. Some economists believe part of this drop reflects a drag due to the cold weather that most of the country experienced last month. On a positive note, new home sales for December 2013 were up 4.5 percent from December 2012.
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