An immediate conclusion to which both home buyers and the market may jump to is that the housing industry is in trouble.  The reason for this is that July reported a 13.4% drop in new home sales.  With that drop was a sharp increase in mortgage rates.  Everyone’s panicking and no one is researching to determine the reason for such drastic numbers.  The answers should come as no surprise to those who work in the real estate industry.  Below are some undisputed facts which will not only explain the skew in numbers, but they also show that it is a strong housing market that causing a shortage in sales.

Mortgage Rates Are Rising / Home Prices Are Also Rising – the relationship:

The market has supported record-low, unsustainable interest rates for the past 1.5 years.  Because of this, the housing market, specifically the refinance market, has started to really strengthen.  Home prices rose in response, inventory disappeared, and banks started to turn the corner on selling strong mortgage portfolios on the stock market.  The bottom line is that the rates absolutely could not stay as low as they were.  And the second thing that people forget is that 4.53% (the average interest rate in August) is still an incredible interest rate for a 30-year fixed mortgage.  This is all still good news – a strong housing market has caused home prices to rise and the economy to get better which in turn has made interest rates rise.

Builder Confidence Index is On the Rise, but Hasn’t Translated to the The Standard & Poor’s Supercomposite Homebuilding Index:

The NAHB has been regularly reporting a steady increase in builder confidence for the past 6 months straight.  The current NAHB builder index is 59 this month – the highest it has been since 2005.  However, the Standard & Poor’s Index is down 29% since May, 2013.  As soon as completed homes reflect builder confidence, this number will not go up very fast.

Supply of Inventory Homes – No Homes Built, No Home Inventory:

Single-family housing starts are up 67 percent from their 2009 low, but they new homes are either just started or under construction.  And, the supply of new homes is approximately 3.5 months, which is a sign of healthy real estate market.  However, even though new home starts are up, it doesn’t mean that there are inventory homes standing empty and for sale across the country.  Therefore, when reports of a decline in new home sales came out in July, it is not because people stopped buying new homes, it’s because there are no new homes to buy…yet!

Healthy Rise in Home Prices – What it Means:

The rise in home prices has been on a record pace since March, 2013.  There has been a concern that with the real estate market recovering, home prices would once again rise to an unsustainable level and create another housing bubble. Statistics are showing that the rise in home pricing is slowing down with fewer and fewer cities across the United States showing record-breaking price increases.  Also, some economists say that the high percentage of recorded price increases is due to prices in depressed markets coming back to normal.

HELP WANTED – Country Wide:

Right now, there is a desperate need for contractors and sub-contractors in the housing industry.  Because of the Recession and literally no homes being built for approximately 3 years, most of these business either went out of business or moved on to other jobs and careers.  Because of this, help is wanted in the home building industry because builders are building once again.
So, the conclusion that the housing market is in trouble because of a decline in new home sales is definitely the wrong conclusion to jump to.  You have to have new homes in order to sell them.  The market should start to see an upturn in sales in 3 to 6 months’ time as these new home starts become new home sales.

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