New home sales are exceeding estimates, but need a dose of reality

With new home sales growing since 2022, why is home construction starting at recession levels? Well, it’s a complicated story if you don’t know how the home builders work, and not all home builders are the same.

The large publicly traded builders have money to pay off mortgage interest and manage their pipelines better than smaller homebuilders. But even with this reality, when mortgage rates hit 7.50% earlier this year, housing numbers and permits for single-family homes fell, and permits for single-family homes fell. the builder’s confidence fell. Earlier this year, when rates were higher, we saw no growth in residential construction hiring.

Then mortgage rates dropped from 7.5% to almost 6%, and things started to look better for builders. However, that was short-lived; The mortgage interest rate is closer to 7% again. I recently raised these concerns about housing construction and the sale of new homes in a interview op CNBC.

However, let’s take a look at today’s new home sales report to see what we can learn and why I’m concerned about the start of home construction.

By Census: Sales of new-build homes: Sales of new single-family homes reached a seasonally adjusted 738,000 in September 2024, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.1 percent (±14.7 percent)* above the revised August figure of 709,000 and 6.3 percent (±18.6 percent)* above the September 2023 estimate of 694,000.

Below are some graphs showing the data lines associated with the new home sales report. As you can see, monthly supply is down and new home sales are up. So what’s the problem? Active inventory is growing here, but it’s not the total active inventory we see in the chart below that’s making builders nervous; it is the number of completed units for sale as mortgage rates rise.

In the new home sales report we have approx 1.8 months of the delivery of completed units for sale; This doesn’t sound like much when you consider what this only amounts to 108,000 homesbut for the builders this is their maximum comfort zone. Concerns about affordability, insurance and property taxes in southern states like Texas and Florida are driving inventory increases in those areas — which doesn’t seem to be the backdrop for many housing permits being issued for construction. I recently discussed this in the previous housing start report.

This would be fine if mortgage rates were 6% or lower, as builders big or small could sell homes comfortably. However, this is no longer the case, and if you don’t have gross profit margins above 20% to buy down the mortgage interest, it becomes more challenging to sell new homes now.

Today’s report shows that 258,000 There are homes under construction, which amounts to 4.2 months supplyhistorically high level. There are 104,000 houses that haven’t even started yet – this amounts to 1.7 months supply and is approximately at all-time highs.

As today’s report shows, builders still have a larger-than-average backlog. With the higher mortgage interest rates, they are in no hurry to issue many more housing permits for apartments and single-family homes. If mortgage rates were 6% or lower this wouldn’t be a major concern, but things have changed quickly with mortgage rates.

Today’s new home sales report exceeded expectations, but sales over the past three months have been revised downwards, without a recent spike in mortgage rates. We are a country without pro-growth housing policies, and if the big homebuilders didn’t pay lower mortgage rates, we would be selling fewer new homes and fewer home starts today. For a country that talks about building millions more homes on the market, a large dose of reality looks us in the face and laughs in our face.