Sales of new single-family houses in May 2015 came in Monday at a seasonally adjusted annual rate of 546,000, which is up 2.2% from April.

And looking at the report on an annual basis, May new home sales were a staggering 19.5% above the May 2014 estimate of 457,000, with huge gains in the Northeast region markets. Topping it all, median sales price of new houses sold in May 2015 was up to $282,800; the average sales price was up to $337,000.

Sounds like a sign of strength, right?

Moody’s Analytics housing economist, Andres Carbacho-Burgos, isn’t so sure.

“Though still positive, the May new home sales numbers are not as strong as they look. A large part of the jump in sales was due to a sharp jump for sales in the Northeast,” Carbacho-Burgos said. “Since more than half of new home sales are for properties that are not yet completed, the jump in Northeast new home sales is most likely related to the June expiration of New York state's Program 421-a, which offered significant tax incentives for real estate development but had not yet been renewed.

“This expiration is also the likely cause of the May spike in Northeast multifamily construction. Excluding the Northeast, other new-home sales decreased slightly in May, though they are still trending upward,” Carbacho-Burgos said.
The new home market has been tightening for the better part of a year and the inventory-to-sales ratio is now at 4.5 months of sales, which looks low relative to the years of recession and slow recovery.

However, the market for new homes is not quite at a threshold needed for accelerating construction, Carbacho-Burgos noted.

“Before the current business cycle, the inventory-to-sales ratio averaged four months of sales from 1997 to 2004 just before the construction boom started. Still Moody's Analytics expects residential construction to accelerate in the coming year not just because the market for new homes is tightening, but because a tighter labor market and stronger wage growth will soon lead to a general increase in household formation and overall housing demand,” Carbacho-Burgos said.

“Curiously, median new-home prices have fallen slightly over the past six months even as the housing market has tightened. This decline seems to indicate that demand has still not taken off and that the tightening is instead the result of lagging single-family construction,” Carbacho-Burgos said. “However, wage growth will soon lead to stronger demand, which will also help increase residential construction and new-home prices over the coming year.”