September new home sales beat expectations, but don’t get too excited. While monthly supply has increased in this report, previous reports have all been revised down and sell levels are still historically low. New home sales are now below recession 2000 levels and have fallen to 1996 levels when interest rates were near 8%.
As I’ve always tried to point out with the home sales data, we haven’t had a massive boom in credit sales like the one we saw during the housing bubble years, so we can’t have a similar huge sales slump from such high levels. This is a positive in the sense that this slowdown is more manageable: sales have not increased with a credit boom stimulated by exotic loan debt structures, so it is more reasonable to find this low level of sales .
Of Census: New home sales of new single-family homes in September 2022 were at a seasonally-adjusted annual rate of 603,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 10.9% (±15.2%)* below the revised August rate of 677,000 and 17.6% (±15.9%) below the September 2021 estimate of 732,000 .
During the housing bubble years, new home sales, housing starts, prices and demand for credit reached extreme levels. It was a very unhealthy setup because demand couldn’t hold up, and new home sales and housing starts were forecast for a rapid and significant decline. As you can see below, we are not working from high levels today.
That doesn’t mean sales can’t fall further from here, especially with rising mortgage rates. However, it shows that builders are better managing their imbalances between supply and demand compared to the housing bubble years. We saw some stabilization in the data as mortgage rates fell from 6.25% to 5%. However, we are now dealing with a mortgage rate of 7%.
The monthly supply has increased in this report, and this line of data has always been crucial to my economic work over the past 10 years.
My rule of thumb for anticipating the behavior of manufacturers is based on the average supply over three months:
- When the supply is 4.3 months, and below that is a great market for builders.
- When the supply is 4.4 to 6.4 months, it is only a good market for builders. They will build as long as new home sales increase.
- The builders will withdraw from construction when the offer is 6.5 months.
Based on Census: Inventory for Sale and Monthly Supply, the seasonally adjusted estimate of new homes for sale at the end of September was 462,000. That represents a 9.2 month supply at the current sales rate.
We are a long way from pulling the new home sales sector out of a recession, as the monthly supply is at 9.2 month. This is a big difference from the existing home sale market, where supply has only been 3.2 months, even with the huge demand this year.
Builders have learned their lesson
The other problem with the builders’ supply is that it took them forever to build houses. When rates rebounded in March, there was considerable risk to the business model with many homes under construction.
Builders face more cancellations this year than last. With mortgage rates having increased so much in a year, all the houses that signed a contract with rates between 3% and 4% are having problems with rates between 6% and 7%. Some homebuyers simply don’t qualify for the house with the highest rates, so their transaction must be cancelled. This is a risk for the economic model of builders: when it takes a long time to complete a house, the risk of rising prices is real.
Manufacturers are keen to manage their imbalances between supply and demand. They don’t just put their heads down and build, build and build. They need to be sure that they will be able to sell the houses they haven’t even started building yet. So when mortgage rates go up – and they have done so significantly – it shakes builder confidence.
The builder supply picture:
- 1.1 months supply is finished product
- 6.0 months supply is still under construction
- 2.1 months of houses haven’t even started construction
We have 56,000 new finished homes for sale. We have 301,000 houses under construction – this is historically high. The number of houses that have not even started is at 105,000.
For some perspective here, imagine that all the houses that were under construction and those that haven’t even been started yet magically hit the market overnight because Santa and his elves decided to help builders for Christmas. Currently, builders have buyers to occupy these homes, excluding those who cancel the transaction at closing. Assume all new home buyers cancel their contracts and those homes fall into the unsold inventory category, which would push inventory data up to 1,656,000. Which is still below the four-decade low average. from 2 to 2.5 million active registrations
Total Existing Inventory NAR: 1,250,000
As you can see, the housing market is still in a recession. New home sales have fallen so low that monthly supply levels have broken a key area for me where builders are halting their construction of new homes with single-family homes.
We can also see that we don’t have many completed houses to start with, and houses under construction or not even started yet aren’t much help either. However, the new home sales sector is vital to the economy, as construction jobs and big ticket items are key here. When rates fall, we can see that the 5% level has attracted some buyers to this market. When rates are above 7%, this sector will be more problematic.
For now, the housing recession continues: housing sales, production, employment and income are all falling together. Until mortgage rates go down, we will always be in this environment. We should all encourage the 910,000 two-unit units that are still under construction to be built for the rental market. With rent inflation falling, this will impact inflation data and make Federal Reserve less hawkish, especially in 2023. However, until rates come down, the new home sales sector will struggle to lower supply and increase demand enough to give them the confidence to build more single-family homes.