New home sales missed estimates today but had three months of positive revisions, which continues the story of the builders managing the higher mortgage rate environment. But they still only have 76,000 completed units for sale today.
That’s right — for all the hype of massive housing inventory coming from the builders, today we sit here still trying to work back to pre-COVID-19 levels with just 76,000 completed homes ready to be moved.
As shown in the chart below, this sector has never provided many unoccupied new units for sale. Even during the worst months of the housing bubble crash years, the builders were always under 200,000 completed units for sale.
The builders sell homes as a commodity, and they had a big spike in monthly supply last year, forcing them to make some deals to move product. This is why I have called them efficient home sellers. However, higher mortgage rates make it harder and harder to pull some of those deals off. I talked about this in an interview with CNBC on Tuesday.
Let’s take a look at the other aspects of the report.
From Census: New home sales Sales of new single‐family houses in August 2023 were at a seasonally adjusted annual rate of 675,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.7 percent (±15.6 percent)* below the revised July rate of 739,000, but is 5.8 percent (±21.1 percent)* above the August 2022 estimate of 638,000.
With the positive revisions in the data, new home sales continue to crawl slowly higher and we are seeing good year-over-year growth in sales because we have easy comps to beat. As we can see in the chart below, sales levels aren’t exactly booming like they were from 2002-2005. As I have stressed, we don’t have a high bar to beat for growth; sales weren’t historically high last year.
From Census: For sale inventory and months’ supply:The seasonally‐adjusted estimate of new houses for sale at the end of August was 436,000. This represents a supply of 7.8 months at the current sales rate.
Here’s my model for understanding the builders:
- When supply is 4.3 months and below, this is an excellent market for builders.
- When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.
- When supply is over 6.5 months, the builders will pause construction.
We are at 7.8 months, and we had a big miss on housing starts last week, mostly coming from multifamily construction.
Below, we can see that permits for single-family homes are rising as the monthly supply of new homes has fallen from the recent peak. The question is, what happens in the future with higher mortgage rates?
And in the chart below, you can see the progress in the falling monthly supply data as the builders work off their backlog of homes. Still, we need more sales to get this level to pre-COVID-19 levels.
When we break down the monthly supply data, it looks like this:
- 1.4 months of the supply are homes completed and ready for sale — about 76,000 homes.
- 4.5 months of the supply are homes that are still under construction — about 254,000 homes
- 1.9 months of the supply are homes that haven’t been started yet — about 106,000 homes
Overall, the report wasn’t great or terrible; the positive revisions show that 2023 will have positive sales for the new home sales sector. One thing we have to remember about the two different housing markets: new home sales had a big monthly supply spike last year,and the existing home sales market didn’t.
The builders have been making deals to sell more homes, but existing homeowners have yet to feel that pressure. The existing home market is only sitting at 3.3 months supply, and the days on the market are still 20 days. A few housing markets are feeling the pressure of higher rates more than others, which explains why home prices are back at all-time highs per today’s S&P CoreLogic Case-Shiller Home Price Index, but existing home sales are near 21st-century lows in demand.
We can’t look to the builders to help us with completed units for sale because it goes against their business model to flood the markets with inventory. This is why the builders only have 76,000 homes ready for sale in a country of 335 million people with more than 156 million people working.
