Dip in New Home Sales: Hiccup or Warning for the Housing Market?

June’s drop in new home sales contrasts sharply with an increase in new home starts but is this a cause for concern?

Dip in New Home Sales: Hiccup or Warning for the Housing Market?As of June, sales of new single family homes dipped by 6.8 percent to the lowest rate in 7 months, resulting in much speculation as to what the future holds for the housing market.

Most experts believe that this dip is just a slight setback and is not a cause for serious concern. After all, compared to 12 months ago, new housing sales are looking good, showing an 18.1 percent bump over June of 2014.

Besides, sales of new homes account for just 8.1 percent of the housing market. Many other market indicators remain strong. For example, resales of older homes actually increased in June to their highest level in 8 years.

Experts also say that several economic factors are converging to continue to lend support to the housing market. For example, a tightening labor market is expected to continue to unleash demand from young adults. These first-time homebuyers are benefiting from the government’s efforts to make financing more easily available and more affordable through lenders like Fannie Mae and Freddie Mac.

Of course, for builders and construction lenders, the overall state of the housing market is less interesting than the demand for new housing specifically. Most builders remain optimistic about the future and continue to plan for growth. Building permits reached an 8-year peak in June, and new construction starts on single family homes increased 8.5 percent over last year.

But what happens if the expected growth in the demand for single family homes doesn’t materialize? Some builders and lenders might find themselves already extended beyond what the market will demand in coming months and faced with the choice of whether to continue with projects that have already been permitted and/or are in progress or stop work and cut their losses.

While no one can predict the future with absolute certainty, one tool that can help is a robust stress testing software.

At ECL, our fund control software includes a highly customizable stress testing functionality that allows lenders to build and analyze unlimited portfolio stress scenarios. You can create the specific stressors you are interested in exploring, configure your own formulas, and select the individual loans or loan groups that are to be exposed to the stress. The software will return a report showing the impact of the stress over time. These kinds of tools can be invaluable in formulating plans for responding to all kinds of possible future market conditions.

In addition to stress testing, our fund control software also includes every other functionality needed to administer a loan, all in one convenient and secure online portal. Please contact us today for your free personalized demo.