News | Question of the Week, WC 27th May
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Q: Why are U.S. new home sales doing so much better than existing home sales?
Existing home sales fell 4% year-over-year in the three months to April, while new home sales rose 7%. The divergence likely is due to the capping of state and local tax deductions from federal income tax at $10K, effective January 2018. Previously, deductions were uncapped. The cap cut the spending power of potential homebuyers in regions of high-tax states with high home prices, notably in the metro New York and Chicago areas, and in parts of California. New home sales are only a small part of the housing market in these regions, because building land is hard to find, so when market activity declined after the tax change, existing home sales took most of the hit, falling well below the pace implied by the level of mortgage applications. The market now appears to be finding a new equilibrium, and sales are recovering. In any event, from the perspective of the wider economy, new home sales are much more important, because each sale increases investment in residential property and triggers the construction of another home as homebuilders replenish inventory. Existing home sales matter, because they boost consumption of household appliances, furniture and other items, but new sales matter more.
Ian Shepherdson, Chief U.S. Economist
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Posted: 31st May 2019
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