The Race Continues: Economic Growth vs. An Economic Tantrum-Week 4

New Home Sales

Data we have received from some of the home builders in metro Richmond, Virginia has indicated that new home sales in the first quarter of 2017 were 27% higher than the first four months of 2016.

New home construction is a leading indicator of the American economy. Although the total value of the new homes represents less than 2% or 3% of the national GDP, the impact of new housing ripples through about 27% of the American economy. Hence strong new home sales should be a very positive economic indicator. Or is it?

One of the significant changes that is driving this increase in home sales is that Generation & (sometimes called the Millennials) appear to be moving out of their parents’ homes and are now buying their first homes. Gen Y represented approximately 30% of new home buyers in the year 2013. But so far in 2017, Gen Y represents over 42% of the home buyers. Gen Y is the largest generation of Americans in the history of America, being approximately 10% larger than the Boomer generation, the previous giant.

Some of this buying is being driven by increased economic activity, fear of rising mortgage rates, and wanting to buy a home while rates are low. This year Gen Y is increasingly being able to find full-time employment.

The contrast of the economic signal for auto sales (negative) versus new home sales (positive) is actually a reflection of the new housing industry operating at 70% of normal. So a decrease in demand caused by higher interest rates would have to cause a drop in demand greater than 30% before it would be reflected in the new housing statistics.

In these uncertain times, it is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.