Buried in the June housing report, New Home prices down 11.5% from April

The number of new homes sold in June jumped to a 5 year high of 479,000 annualized purchases, in addition the median new home price was up 7% year over year.  This made headlines in in across the business news sphere as an strong indication that the housing market was coming back even though mortgages rates had their biggest increase since 1987 during the month of June.   These two facts were touted as evidence that rising mortgage rates would not affect home prices or sales.  So, all is well with the housing market…well not so fast.

Almost immediately bloggers and analysts combed through the June data and found some interesting trends that was left off the initial broadcast reports on all the business new channels.  Hours later some of these facts made it into the written versions of these news stories.

Home builders boost prices amid rising rates

Despite a major jump in mortgage interest rates in June, the nation’s home builders continued to pass on their own cost increases to buyers. The median sale price of a newly built home was $249,700, a 7 percent increase from a year ago.

“Demand is still there and we are able to raise price,” said Debbie Rosenstein, VP of sales and marketing for The Christopher Companies, a small regional builder serving the mid-Atlantic region. “We are getting pricing increases from our subcontractors and material costs are going up.”

Mortgage rates jumped over a full percentage point from May through June of this year, robbing home buyers of much-needed purchasing power. While they have now settled back a bit, they are far from the record lows of the past two years.

“The recent increase in mortgage rates hasn’t slowed demand, as long as home affordability remains high,” noted Bob Walters, chief economist at Quicken Loans. “We are, however, seeing an increased urgency from potential new home buyers as they move to secure today’s historically low rates.”

New home sales jumped more than 8 percent month-to-month in June, but May’s sales numbers were revised sharply lower, and prices, while up from a year ago, are down 11.5 percent from April. That has some housing skeptics less optimistic about the builders’ prospects.

“Remember, last month on the ‘strong’ but FAKE new home sales print of 476k, home builders rallied, and every bull took a huge victory lap. Today we learned that was all garbage,” noted California-based analyst Mark Hanson. “Bottom line: May was a huge miss. Prices have tumbled as rates surged. And June is suspect because of the huge lower May revision.”

Mark Hanson has a more even-headed analysis of this June report.  The spike in mortgage rates caused new home prices to tumble.  Also, watch for the revision June numbers next month, because the May final number was revised down, the actual number of closed sales will probably be much lower.

ZeroHegde actually looked at median home price of $249,700 and reported the last time at this level.

New Home Sales Rise As Average, Median Home Prices Drop To 2012 Levels

So good right right? Not really: the reason why there was a pick up in volume was not because there was far greater demand, but for the usual Economics for Dummies reason why there is demand: prices plunged.

As the chart below shows the average and median home prices both tumbled to the lowest since November 2012. But what is not made up in price at least will be more than made up for in volume.

This is significant drop in home prices for new home sales and it was good catch by ZeroHedge  This shows that most of the recent increases in new home prices in all of 2013 and some of 2012 have evaporated in just two months.  Again this is new home sales.  Existing home sales just had huge year over year increase in prices in orange county.  But existing home sale prices tend to more sticky when values drop, this is due to sellers still trying to obtain that WTF pricing from a few months ago.

Anthony Sanders at Confounded Interest also investigated the what the financing behind these mortgages.

The average size of mortgage purchase applications peaked on May 1st and have been generally falling since with mortgage rate increases.

The white line with the blue shaded underneath is the average mortgage size.  The average mortgage size over a 2 1/2 month period has dropped nearly $12,000.  Again that is a significant drop for a short period of time.   He also looks at purchase applications

 Mortgage purchase applications are flat but new home sales are booming? Can you spell CASH?

To summarize, there are 3 trends in the new home market.  1) The median sales price of new homes in June dropped to November 2012 prices. 2) A larger percentage of these new homes were purchased with cash.  3) The size of the average mortgage has shrunk by $12,000.  So, what is the implications  of the new home sales figures?

The trends in new home sales usually precede existing home sales.  Builders need to move inventory, but existing home sellers are a little sticky with their prices.  However, this drop in new home prices puts more pressure on existing home sales as buyers can get better bargains from builders.   This will probably leave more inventory on the market, but Larry still shows it’s very historically low.   What is hilarious is that many “experts” reassured us that higher mortgage rates wouldn’t impact home prices, however this affect on new home prices was almost immediate.  The good news is that you now needs a smaller down payment to purchase that new home you wanted.

If mortgage rates increase  to 5.0% or 5.5% (depending on what happens with the Federal Reserve) it will probably erase the all of the recent gains in new home prices and will probably impact existing prices as well.  2013 could be peak home price for some time, unless mortgage rates drop back down to sub 3.5% levels.  Also, this report is signed contracts, not closed contracts for new homes.  May new home sales have  a steep revision in the June report and same time will probably happen with the June new home sales the future July report.

Does higher mortgage rates actually leads to more new home sales?  If mortgage rates increase past the 6% eventually it might lead to higher sales, because home price would fall and the down payment requirement would be smaller.  When I’m discussing down payments I mean in the 20% down, therefore no lifetime PMI.   Even the home owners property taxes would be lower because it will be based on the current sales price which is another advantage of higher mortgage rates.   Mores sales might lead to more construction jobs in an economy that disparately needs jobs, however there is cloud inventory of vacant homes that might decrease the need for new homes.

There would be two big losers in this higher mortgage rate environment, the lenders would lose the ability to manage cloud inventory to control home prices and the delinquent loanowners that will face a higher probability of foreclosure. High mortgage rates would lead more short sales sold at greater losses and more foreclosures that will probably priced below the market values of non distressed sale prices.  In fact this week both delinquency numbers and short sale number both increased.   Bad news for the lenders bottom line is good news for future potential new home buyers which is much lower prices.