Tuesday’s new home sales report came as an omission of estimates and previous revisions were all negative. This line of data confirms what we all know to be the case: the housing market, at least as far as construction is concerned, is in a recession.
What I’ve always tried to do with my economics work is to connect the dots or show a path to why something might happen. Since the summer of 2020, I sincerely believe that the housing market could change once the 10-year yield exceeds 1.94%. However, for the new home sales sector, this would put their business model in jeopardy.
We talked about it in March, and even last year, when I wrote about the problem of the premise of the housing construction boom. “I don’t expect a housing construction boom. Builders learned their lesson in the mid-2000s and understand that it is not in their interest to create more residential real estate beyond the standard demand curve. They also learned their lesson quickly in 2018, as mortgage rates at 5% were too high for construction growth.
Mortgage rates have gone up and builders have a lot of homes under construction, so they’re going to hold things off until they know they can sell their homes. That’s why I raised the red flag for the fifth recession in June. In reality, everything seems normal as long as you know that builders are not building houses for society; they build houses to earn money.
I talked about this last summer in an article called: Why we can’t get out of a boiling real estate market: “During the previous economic expansion from 2008 to 2019, the housing market was subject to the constant refrain of building more homes. Building more homes, it was said, would solve all sorts of social problems, from making homeownership more affordable to ending homelessness.
“Today we may be less inclined to believe that a glut of new homes is the panacea society has been waiting for, but the siren call to build more homes continues to sound from a crowd of housing experts and social benefactors The problem with this scenario is that social benefactors don’t build houses, builders build houses, and they build houses for money, not to cure society’s ills.
The previous economic expansion (2008-2019) saw the weakest recovery in new home sales; thus, we had the weakest housing construction cycle ever. This makes sense to me; builders missed sales estimates in 2013, 2014 and 2015. Then, in 2018, they saw a spike in supply as mortgage rates hit 5%. In response, they blocked construction for 30 months. Today, the rates are even higher.
It is what it is: the housing dilemma we live with in America. If builders need mortgage rates below 4% to build and existing home prices rise nearly 20%, like Tuesday S&P CoreLogic Case-Shiller The House Price Index report showed that it is difficult to see how we will get out of this mess.
Sales of new homes
Of Census: Sales of new single-family homes in June 2022 came in at a seasonally adjusted annual rate of 590,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.1% (±15.0%)* below the May revised rate of 642,000 and 17.4% (±11.6%) below the June 2021 estimate of 714,000
Today, new home sales are back to 2018 levels. The peak of the housing bubble was around 1.4 million sales. At the current level of 590,000 houses, builders are in a different position to deal with their inventory issues because they haven’t had a boom in credit sales like we saw from 2002 to 2005. We’re easily below the levels of the 2000 recession and we are back to 1996 demand levels. Builders will manage their build houses to make sure they don’t have too much product. Additionally, they are hoping for lower mortgage rates, which helped them in 2019.
Census: The median selling price for new homes sold in June 2022 was $402,400. The average sale price was $456,800.
There is an extremely unhealthy housing market theme here, and my concern is overheated house prices, which may have a greater impact on the housing market than if price growth were stable. The house price party started in 2020, which was not good. Manufacturers had pricing power and used it wisely to make profit margins. The consumer had to pay the price. This is how supply and demand work; the only thing that can change pricing power is higher tariffs.
According to the census: the seasonally adjusted estimate of new homes for sale at the end of June was 457,000. This represents a 9.3 month supply at the current sales rate.
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, this is 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.
As we can see below, the monthly supply has taken off again. The manufacturer’s economic model is of course threatened.
However, we must bear in mind a reality different from the past: only 0.83m100 of the supply are finished housing products.
- 6.22 months supply is under construction
- 2.24 months of supply hasn’t even started yet
We should expect builders to not even bring a shovel to the ground of homes they haven’t started yet – and they will slow down the process to ensure homes under construction will be sold. In the past, lower mortgage rates have made this process easier for them, so they know what they’re doing here. As you can see, like everything housing, nothing in 2022 looks like 2008.
This is the manufacturer’s biggest competition. They took advantage of the weak inventory story in 2020 and 2021.
NAR: total inventory data
2007 Peak About 4,000,0000
I’m not a home building boom person; this industry has limits. The new home sales and housing starts sector will drive things forward until mortgage rates come down and they can sell more product and feel comfortable rebuilding homes. Until then, it’s nothing but a wildly unhealthy housing market.