Today the Census Bureau new home sales report came in as a miss of estimates at 745,000. In addition, revisions were all negative and the monthly supply of new homes rose. In contrast to the existing home sales market, which I would say is outperforming currently with the recent growth in sales, the new home sales market is just OK and has been for some time. Given that, why has the builder’s confidence index risen so much in recent months?
The recent spike in the monthly supply of new homes is not what the builders want to see, no matter what anyone tells you: that is their lifeline for their confidence. I wrote here about why the builder’s confidence has risen recently and why housing permits are doing fine. For this Thanksgiving, the builders are thankful that the monthly supply of new homes has just stabilized from the recent sharp rise.
From Census: The seasonally‐adjusted estimate of new houses for sale at the end of October was 389,000. This represents a supply of 6.3 months at the current sales rate.
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 an OK market for the builders. They will build as long as new home sales are growing.
- When supply is 6.5 months and above, the builders will pull back on construction.
Currently, the headline number is at 6.3 months and the three-month average is basically at 6.3 months. It’s just an OK marketplace, nothing too exciting is going on here on the economic front. However, we are not that far from me raising a red flag on the new home sector as I did in 2018.
As long as new home sales can grow, it will be an OK marketplace.
From Census: Sales of new single‐family houses in October 2021 were at a seasonally adjusted annual rate of 745,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.4 percent (±21.1 percent)* above the revised September rate of 742,000, but is 23.1 percent (±15.1 percent) below the October 2020 estimate of 969,000.
As you can see below, the stabilization of sales and monthly supply is evident, as new home sales have stabilized as well. For housing, I have stayed true to my bond yield mortgage rate call of the summer of 2020. For housing to slow, it needs mortgage rates above 3.75% and the 10-year yield to break 1.94%, which wasn’t part of my 2021 forecast.
I’m now doing a weekly podcast called The Rundown with HousingWire’s Editor in Chief Sarah Wheeler and in this week’s episode, I make the case for why I believe mortgage rates may get below 3% again rather than a sustained period over 4% in 2022.
One of the biggest concerns I had with housing in 2021 was not that home prices were going to collapse as the forbearance crash bros were promoting on their terrible YouTube, Twitter, Facebook, and Clubhouse chats. It was that home prices could take off in an unhealthy way. That’s exactly what happened in the existing home sales market and the same happened for the new home sales market. In this scenario, builders can’t help themselves: when monthly supply breaks over 4.3 months, they will pad their margins without real consideration of the long-term consequences of having great pricing power. However, even they knew they flew too close to the sun recently.
From Census: The median sales price of new houses sold in October 2021 was $407,700. The average sales price was $477,800.
This is also why I still will never believe in a construction boom premise here in America.
I explained my take here.
When rates rise, the builders are at a disadvantage versus the existing home sales market, which is a bigger marketplace with cheaper older homes. We already see the difference between the two sectors clearly as new home sales are just OK and the existing home sales market is outperforming.
Speaking of which, I don’t understand why some of you were worried about a second-half housing crashing or about how the entire housing market is held up by investors. It’s such a crazy anti-intellectual discussion, but housing does bring the crazies out of the cave. Purchase application data has gotten noticeably better in the last 12 weeks, this is your big reason why home sales have picked up and will end 2021 higher than 2020.
Builders remember 2018 very well because while 5% mortgage rates didn’t really impact the existing home sales total inventory levels much, it created a supply shock for the builders.
Their stocks were down over 30% and one builder even said it was the worst fourth quarter since the great financial crisis. They know higher rates give them a disadvantage and total sales levels are not working from a low bar anymore as they did from 2008-2019. However, they’re not super hot either — slow and steady wins this race.
I can see why the builders are thankful this Thanksgiving and why their confidence has perked up a bit. Despite the drama over delays in construction, closing times, labor and the cost of materials, the stabilization of the monthly new home supply data has made the difference. All these things would usually be making the builders act like the Grinch and have holiday blues, overeating. However, they have shown a bit of perkiness lately.
Hopefully, my explanation with monthly supply can make some sense of this. As someone who always noted the weakest housing recovery from 2008-2019, the monthly supply data line was always my go-to data line source, so I am just sticking to my own model for housing.
Everyone enjoy your Thanksgiving and make sure to tell the people you love that you love them. A lot of Americans have lost that privilege during this crisis.
