Why new home sales took such a big hit

The new home sales report had such a big impact today that many people had to double check the numbers – and I understand. The estimates were in favor 623,000 but sales came in 739,000. This isn’t my first rodeo with new home sales data and I think these numbers will be revised lower, but a beat is a beat.

There are other sources we can consult to get clues about this report in advance. Here are three things to consider to get a sense of any change in direction before the new home sales report comes out.

1. Look at the direction of the new home market purchasing research

Not many people know that the builders have their own application for purchase of new home research that the Association of Mortgage Bankers shares once a month. That index has fallen noticeably lately, but in the last report a few days ago the index had a noticeable increase, which meant that demand turned to the positive.

2. The confidence survey among housebuilders has a future-oriented component

The NAHB/Wells Fargo The monthly survey from the housing market index builders includes a section that shows what homebuilders think about the demand for single-family homes in six months’ time. This index showed some real weakness as mortgage rates rose. But in the past two months the light has turned positive. This Index is aimed at smaller builders, so you know the larger builders are feeling even more positive than their smaller counterparts.

3. Homebuilders have outperformed new home sales as interest rates fall

When mortgage rates fall below 7%, builder sales data has outperformed the existing home sales market because in that environment it is cheaper for builders to cut rates even further. It does become more expensive if the rates are higher than 7%, but below 7%. We have seen demand pick up recently.

Let’s look at the details of the latest report.

By Census: Sales of new houses Sales of new single-family homes reached a seasonally adjusted 739,000 in July 2024, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 10.6 percent (±16.5 percent)* above the revised June figure of 668,000 and 5.6 percent (±21.3 percent)* above the July 2023 estimate of 700,000.

This is a huge estimate. As you can see in the chart below, this sales report went vertical, meaning it will likely be revised lower, but will still ultimately beat estimates. All of the above factors contributed to this gain and we should also take into account that sales have declined recently, giving us a lower bar to exceed expectations.

Inventory and months stock for sale: The seasonally adjusted estimate of the number of new homes for sale at the end of July was 462,000. This represents a 7.5 month supply at the current retail rate.

This is also a huge drop in monthly supply, which will be revised 100% higher, but will still be a positive drop. This is critical because we need the builders to sell more homes if they are going to build a lot of homes in the coming years.

The number of completed units ready for sale has not changed much and this data is around an average level for the builders. The builders don’t offer many vacant houses for people to choose from; they sell houses as a commodity, so they manage their supply well. This is why housing starts and permits are back at recession levels today.

All in all, this is an excellent report. I know this report will be revised lower, but it’s exactly what we needed: it shows the value of lower mortgage rates. If we want to build a lot of homes, we’re going to have to have demand for them, and lower mortgage rates will be the critical variable in ensuring that single-family permits stop declining and start growing again.