New home sales are struggling to grow due to higher rates

By Census: New Home Sales: Sales of new single-family homes reached a seasonally adjusted annual rate of 617,000 in June 2024, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.6 percent (±14.6 percent)* below the revised figure of 621,000 in May and 7.4 percent (±15.2 percent)* below the estimate of 666,000 in June 2023.

The market for new home sales is not collapsing and the large, publicly traded builders still have enough excess gross profit margins to pay off mortgage interest if necessary. However, we have limits here, because not every builder is the same. We wrote about this after the last housing start report.

So the question is: will rates come down to help builders sell and build more homes? The ball is in the Fed’s court. They see the same thing as I do, so it’s a public policy choice at this stage.

Active inventory above pre-COVID-19 levels

The new home sales market does not have millions of active completed homes for sale, but we are currently back above pre-COVID-19 levels. Now 102,000 homes does not seem like a lot, but builders will not sit around the table with permits with mortgage interest rates at this level. Remember, it’s not the March of Dimes; they are here to make money. With permits declining for both single-family and five-family homes, lines are being drawn in the sand about the future of the construction workforce.

Monthly supply: 9.3 months

For sale inventory and months stock: The seasonally adjusted estimate of the number of new homes for sale at the end of June was 476,000. This represents a supply of 9.3 months at the current sales rate.

The monthly supply from the previous month was adjusted to a lower level, causing it to increase slightly again.

I have a model for the builders regarding the monthly offer. In more traditional markets, when monthly supply exceeds 6.5 months, builders will pause permitting if they are unsure about new home sales. Last year they were more confident in sales and grew permits even at high monthly supply, but not so much this year.

Here is my model for understanding the builders:

• When the offer is 4.3 months and below this is an excellent market for builders.
• When the offer is 4.4-6.4 months, this is simply a great market for builders. They will keep building as long as new home sales grow.
• When the offer is more than 6.5 monthsthe builders will interrupt construction.

Breakdown of supply data

When we discuss the monthly supply of new homes, we never mix it with existing inventory, unless we are talking about homes that are completed and available for sale. Because most of the supply is under construction, that supply is not equivalent to an actual home that you can buy and move into today.

We have also had an abnormal number of houses under construction; A record number of homes hasn’t even started yet. So it’s not shocking that permits aren’t being issued now that there’s a downward trend in new home sales and more inventory in the pipeline. The builders need the confidence that they can sell these houses when they are finished.

Remember that not all builders are the same; many smaller builders do not have the luxury of paying off mortgage interest for their buyers. Here is the breakdown of the offer:

• 102K completed homes for sale = 2.0 months
• 274K homes under construction = 5.3 months
• 100K homes not yet started = 1.9 months

Today’s new home sales report isn’t a surprise, but it’s not the most positive news. If this trend continues and permits for single-family homes continue to decline, construction workers will be at greater risk of layoffs once construction of single-family and five-family homes is completed. New home sales are not collapsing and we are not seeing a major escalation in cancellations. However, unless mortgage rates fall, this will increasingly become a problem.

The only positive twist today is that new home sales are at an all-time low and are not ramping up from an elevated level like the peak we saw in 2005. At that time, sales were 1.4 million, so this situation can be better managed in this situation. cycle than that one. However, not all builders have significant profit margins, and smaller builders have become more concerned lately.