An interesting wrinkle in the new Covid economy showed up today. The U.S. Department of Commerce reported that new home sales in August rose by 4.8%, on top of a spike 13.9% in July.
Buying New Homes
Overall home sales are having difficulty in no small part because home buyers are reluctant to do several showings in a day in a Covid world. Those showings are what motivate buyers to purchase existing homes.
Unlike existing home sales, new homes are typically sold via model homes. Model home are shiny, bright, and seem cleaner, even though more people may actually move through them each day. Furthermore, rather than having to see numerous homes to find the perfect one, buyers need only find a model they like. Builders then allow buyers to tweak that model.
Low Mortgage Rates
Record low mortgage rates are also helping drive sales for new construction. Unlike existing home sales that are dependent upon subjective appraisals, lenders can easily get a feel for the current value of the one of many new buildings a particular buyer looks to purchase.
Finding a mortgage, however, even for new construction is getting harder. It turns out lenders aren’t too keen to take on the risk of a tricky job market, where borrowers who look great today, are unemployed tomorrow for the peanuts of a 2.8% interest rate. As a result, lenders are less likely to allow for lower credit scores, or reduced paperwork loans. Smaller down payment programs are also tightening.
Potential borrowers need to come to the table with fully documented income and a 20% down payment if they want the best chances of finding a mortgage offer.
Higher new home sales are great news for the economy. Home construction not only employs a huge number of Americans, each home requires materials and supplies. Much of those materials are made, warehoused, or transported by other American workers. In other words, a healthy new housing market, fuels a better job market.
As winter approaches, investors need to watch whether this was just pent up demand from the virtual shutdown in new housing sales due to the coronavirus earlier this year, or if this is the real deal. Watch the November numbers especially to see if there is a retraction of this mini-boom, or if there is just a reasonable seasonal adjustment. Then, adjust expectations for housing and jobs accordingly.