New home sales came in as a massive beat of sales estimates, with a 28% month-to-month increase. And, out of the 461,000 new homes available for sale, only 49,000 have been completed and are available to be occupied. These are both crazy stats!
Monthly supply data fell — in normal times this would be looked at as a bullish report for housing. However, in this environment, with falling year-over-year purchase application data, this report isn’t as bullish as it seems.
The explanation has a lot to do with the fact that new home sales are already very low, so these month-to-month reports can look wild. We had a period this summer when mortgage rates moved from 6.25% back down to 5% and some of the new home sales activity picked up. In general, however, these data lines are just very volatile and prone to revisions. In fact, we had this happen with new home sales in May, only for the data to revert back to the trend of declining sales.
The Census Bureau reported that sales of new single-family houses in August were at a seasonally adjusted annual rate of 685,000. This is 28% above the revised July rate of 532,000, but 0.1% below the August 2021 estimate of 686,000.
As you can see below, new home sales were historically low and as I’ve said before, we aren’t working from the peak 1.4 million level we saw in 2005. In fact, new home sales are below the recession level of 2000 and back to 1996 levels already. So, when we have a month where demand picks up, it can move the needle in a big way.
Now, revisions are always key and the revisions in this report were positive. So the data can be very extreme in this environment, especially in a brief period of time when rates fell and some deals were able to close. For that reason, I wouldn’t read too much into the revisions.
However, it does show that the builders are in a much better spot to deal with their massive supply, compared to the 2005-2008 period.
Of course, mortgage rates are much higher right now. As I am writing this, we have hit 7% on mortgage rates and that means the builders will need to be more mindful of their future supply and demand issues. They are good at selling their inventory much quicker than existing home sellers, who might still be stingy on prices.
My rule of thumb for anticipating builder behavior is based on the three-month average of supply:
- When supply is 4.3 months and below, this is an excellent market for the builders.
- When supply is 4.4 to 6.4 months, this is just an OK market for the builders. They will build as long as new home sales are growing.
- The builders will pull back on construction when the supply is 6.5 months and above.
The latest Census data shows that the seasonally adjusted estimate of new houses for sale at the end of August was 461,000, which is a supply of 8.1 months at the current sales rate.
As you can see, the monthly supply data swings wildly and, unlike the existing home sales market, it can move a lot faster up or down, especially in this rising-rate environment where a lot of homes are still under construction. Until the monthly supply gets below 6.5 months on a three-month average and new home sales are rising, this sector is still in a recession.
This rule of thumb for builders has worked for me in the past, as it adjusts to the difference between the new and existing home sales sector.
And remember: Out of the 461,000 new homes available for sale, only 49,000 are completed and available to be occupied. That’s not a lot of homes and the builders will take their sweet time building out the rest of the homes in construction and the homes that haven’t even been started yet.
Out of 8.1 months of supply, 5.36 months are under construction, 1.86 months have not been started yet and only 0.86 months are completed.
You have to understand, the builders are here to make money and they have ways to move product much more efficiently than existing home sellers because they don’t need to obtain shelter once the home is sold. They just need to manage the supply and demand of their product and make sure they sell it at a price that works with their business model.
So, it’s not surprising that housing completion data hasn’t gone anywhere for some time now.
Hopefully, this can explain the crazy report we got today: not only was the headline a massive beat of estimates, but the previous month’s sales missed was revised higher. Because sales levels are so low and the data can get wild on a month-to-month basis, we do have reports like this from time to time.
The existing home sales marketplace is much bigger and has a lot more sales than the new home sales market, so it tends to not have crazy moves like this outside of some one-month event like the TRID implementation or COVID-19 pause in buying.
However, in general terms, the new home sales sector — just like the larger housing market is still in a recession as sales, production, jobs, and incomes are down. At some point in the future this changes, however, for now, rates are too high and I don’t see a change until they go lower. Once the monthly supply data can break under 6.5 months on a three-month average and sales trends are positive, I will change my tune.
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