Home sales continue to slip, setting the stage for a spring rebound

Home sales continue to slip, setting the stage for a spring rebound

Sales of new single-family homes slipped for the second consecutive month, the Census Bureau reported this morning, falling to a 590,000 unit annualized pace in January. This marks a 7.8% decline from December’s upwardly-revised pace and falls below consensus expectations of 600,000 new homes sold.

Combined with disappointing results for existing home sales from January, this morning’s reports shows some weakness in housing demand over the past couple of months. A couple of factors have likely contributed to the recent weakness however, suggesting that this softness is likely temporary.

First, harsh winter weather, likely restrained some housing activity over the course of the month, as the East and Southeast experienced unseasonably cold weather and snowstorms in January. These purchases likely get pushed into subsequent months, which should lead to stronger sales results in February and March.

In addition, potential homebuyers have faced additional uncertainty over the past couple of months as a result of the recent passage of the Tax Cuts and Jobs Act (TCJA). In addition to changes in corporate and personal income tax rates, the TCJA also contained changes to the mortgage interest deduction. Under the new law, mortgage interest deductability is now limited to the interest paid on up to $750,000 of mortgage debt (down from the previous limit of $1 million). While this change in tax law is not expected to significantly alter trends over the long-term, potential buyers may be delaying purchases temporarily as they figure out all the implications of the change.

Overall these results are disappointing, though not necessarily a cause for alarm in the housing market. New home sales are notoriously volatile, so gains and declines exceeding 5% month-to-month are not uncommon. Despite the declines in December and January, new home sales remain in a general upward trend.

With healthy labor market conditions and generally improving income growth in the economy, sales growth is likely to improve in upcoming months. Look for a rebound in sales growth as the economy heads into the spring months.

Behind the numbers

The general improvement in the housing market is one that has been long overdue. Housing activity plummeted beginning in 2006 and remained depressed throughout the early years of the recovery. Even with the rebound in new home sales over the past 5 years, the current pace lags far behind the pace experienced in the late-90s and early-2000s.

From a freight perspective, home sales push activity in a number of other areas in the economy. For one, increased home purchases tighten the existing inventory of homes, which then spurs construction activity in the economy. This benefits flatbed carriers and also boosts the transportation of associated building materials. Second, home purchases (particularly new home purchases) help drive the demand for other large goods such as furniture and appliances. Other industries such as garden equipment and supplies benefit from a rise in housing activity, and continued improvement in the housing sector should broadly contribute to the economic expansion this year.