Skip to Content
US Videos

Housing Still an Economic Bright Spot

Morningstar's Bob Johnson sees the surge in new home sales as confirmation that housing remains a key underlying strength of the economy.

Housing Still an Economic Bright Spot

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. New home sales were very strong this month and I'm here with Bob Johnson, our director of economic analysis, to see if this is going to be a sustainable trend.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So April's new home sales, up over 16% up than the previous month. Are we in housing bubble 2.0 here? What's going on, why is that so strong?

Johnson: It was an incredibly strong month, and that 16% that you cited, I mean that's month-to-month that's not even year-over-year data. And obviously it's probably not reality, because the homebuilding industry couldn't ramp up that fast. It's a combination of seasonal factors and what month the sale gets counted in. But that number was unusually strong. I'd like to back off of that number which was 619,000. I mean that's a great number and the biggest month-to-month growth rate we've seen in decades. If you kind of roll 12 months together and look at them, you get a 10% to 12% growth rate right now. That's extremely consistent with starts and permits, and a very healthy level by the way. I mean that would add meaningfully to GDP growth.

Glaser: So you've taken a deep dive into this data. What's really driving these new home sales--is it single family homes? Is it apartments? What are people buying and building right now?

Johnson: Well, in this particular report, the new homes report is strictly on single-family homes and it even takes it one step back and its primarily tract homes. It excludes kind of, if you knock down your current house and build another one or a contractor builds a house in the neighborhood and lives in it for a while and then plans to sell it. Those are all excluded and that's about 20% of the data set that kind of gets thrown out from this report. This is really kind of the big tract home report.

Glaser: So when you see that, is that positive for the economy to have kind of these tract homes being built versus other forms of housing?

Johnson: Well, versus apartments it's certainly a big deal. I mean the average square footage, when we did some of the work this week, is roughly double the size of an apartment. So it has a much bigger economic impact, because of the common areas and a few other things, I mean the expenditures are even less. So it's nice to see the apartment growth which was kind of driving in the early part of the housing recovery, but now we are seeing it come in the single-family mode. So that's what's really got everybody excited about these reports.

I think the other really exciting thing about this particular report was the strength in homes bought that hadn't even been started yet. This report counts homes that were halfway finished, that maybe you had to pick the dishwasher and the wall colors and so forth, and it also includes homes that are completely sitting on the lot, completely done. You don't get any options. Very unusually the mix was about a third for each, which is highly unusual. Usually we haven't had very many of the homes not started yet. In fact, this year by individual units we sold 20,000 ones that were on the drawing board. That's versus 12,000 a year ago. That's a pretty incredible number, and it says something about buyer confidence when they are willing to buy something that's kind of sight-unseen if you will, rather than being able to see it and touch it in person.

Glaser: How much of that confidence do you think is driven by lower gas prices? Are people willing to go out to these further-out suburbs wherever these tract homes are being built because they see less pain at the pump?

Johnson: I think that builders have become a lot more cautious and I think they kept on going further and further out, to get cheap land and now I think they have kind of come in a little bit in terms of where they are building the homes and they aren't kind of extending their range five miles every five years like they were doing before. I think that maybe now they are trying to build a little bit closer in. So I don't think that gasoline prices are nearly as big an influence--although it hasn't hurt, that's for sure--as the fact that more people have jobs and as well as the fact that you've got this demographic, the 30- to 35-year-olds where you buy your first-time home, was a very challenged category in terms of size because of the way the birth rates fell. Now that's kind of accelerating again, and that will drive the demographics for housing.

Glaser: So if it has this demographic tailwind, would you expect to see pretty strong sales throughout the rest of this year?

Johnson: I think we're settling into this pattern of 10% to 12%, and again we're going to see volatile numbers, and if you see a bad number next month, don't sweat it. I mean, I think the key is if you look at starts, you look at permits, and you look at new home sales--which all come at the data in a slightly different way. For single-family homes you are talking 10% to 12% growth. And I think that's really a great number.

Glaser: What does that translate into GDP impact?

Johnson: Well, housing is about 3% to 3.5% of the GDP calculation right now and some of it's existing home sales commissions. Some of it's remodeling and the majority of it's new homes and apartments. And I think that certainly this is good news. This is a key component and remodeling's also doing well. So we think that overall housing will add probably somewhere 0.4 or 0.5 to GDP growth, which is a lot in a world where GDP growth is about 2% to 2.5%. So this is really kind of a big number. This is a key underlying strength of the economy.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching. 

Sponsor Center