New home sales beat overall estimates and had positive revisions. How the hell did this happen? Additionally, monthly supply data has been revised down from nine months to 8.3 months for the previous report. Let me tell you, we had a lot of shocked faces in economic land this morning.
First, we must never forget that new home sales reports can be very wild from month to month and positive or negative reviews are commonplace. However, this report had positive reviews, so it is not just a headline.
Here’s the honest truth about the new home sales data: We had the weakest recovery in new home sales ever during the previous expansion. We’ve never had a credit boom in a housing bubble, so we can’t have a credit boom-bust in a housing bubble. This means that sales never really worked from a massive high, driven by exotic loans. This is an essential thing to remember in the coming years.
Of Census: New Home Sales Sales of new single-family homes in May 2022 were at a seasonally adjusted annual rate of 696,000, according to estimates released jointly today by the US Census Bureau and the Department of Housing and Urban Development. That’s 10.7% (±18.9%)* above April’s revised rate of 629,000, but 5.9% (±22.0%)* below the May 2021 estimate of 740,000.
As you can see below, new home sales are still below the 2000 recession level, and we have also just experienced a significant rise in mortgage rates. These monthly reports can be very wild, and I anticipate big swings in the reports until things calm down with mortgage rates.
From the census: Selling Price The median selling price for new homes sold in May 2022 was $449,000. The average sale price was $511,400.
We can see below that prices got pretty crazy after 2020. Builders had pricing power and used it well to make their margins look nice even with all the extra costs to build their homes. The market has changed with much higher prices, but for the most part manufacturers are managing the recent weak sales as best they can. Don’t trust this report, they know what they’re dealing with now that mortgage rates are above 6%.
Census: Inventory for Sale and Monthly Supply The seasonally adjusted estimate of new homes for sale at the end of May was 444,000. That represents a 7.7 month supply at the current sales rate.
Monthly new home supply data is often confused with the existing home sales market. People go to Fred website, type in the monthly supply and think of it as the existing home sales market. I deal with people who tell me the monthly supply is 7.7 months. They think there is no housing shortage.
So for Twitter, I had to create a rule.
We have two rules
1. We’re not talking about Fight Club
2. We are not saying that the supply of the new home sales market is the existing home sales market.
The monthly market supply for the sale of existing homes is at 2.6 months.
Five months of supply are homes under construction. This is a high standard, and two months supply has yet to begin construction, and a huge 0.68 months are finished houses. Yes, I went below a month there. As someone who wants to see more inventory, not the best lines of data, but we are working to finish these houses.
My rule of thumb for anticipating the behavior of manufacturers is based on the average supply over three months:
- When supply is 4.3 months and under, it’s a great market for builders.
- When supply is 4.4 to 6.4 months, this is an acceptable market for builders. They will build as long as new home sales increase.
- Builders will withdraw from construction when the supply is 6.5 months and over.
The manufacturer’s confidence has dropped significantly as its business model is threatened with higher rates. Today’s new home sales report doesn’t change the fact that builders are aware of what they’re dealing with. This is why their level of confidence has dropped.
I recently raised my fifth recession red flag due to this drop in their confidence, sales and housing permits and this report does not change that. Once again, this cycle is very different from that of the 2002-2005 period; I hope you can see it with the data I provided. I have a running joke with my friends who have housing issues that they can’t stop screaming in 2008, but app purchase data today is already below 2008 levels. Annoying!
Overall, New Home Sales was a shocking report, not only as a headline, but with positive revisions to sales and monthly supply data falling with revisions to monthly data on the offer. I can’t remember a more shocking new home sales report than this one.
That said, these reports are very wild monthly and could be anywhere for the next 12 months. That’s why reviews are crucial, and until builder confidence changes course, I wouldn’t place too much weight on this report alone. However, I would focus on new home sales returning to the lows we saw in 2018, the last time rates rose. Not exactly a period of booming sales. In fact, just for some context, new home sales today are back to 1996 levels.
There’s an upside to not having a housing credit boom this time around – it means you can’t have a major housing bust. This means that during downturns, builders can better manage their supply. I would add that final note for next year. As the total inventory of existing homes increases, builders will be aware of this, which is another reason I think they will slow down construction. The existing home sales market is their biggest competitor, and they have benefited from the fall in inventories in this sector to historic lows. If we bring the total existing inventory back towards 2 million, this advantage disappears. It is currently 1.16 million.