New home sales missed sales estimates, but the builders’ stocks have been roaring higher. What gives? There are two key things to remember before I go into the report’s details. Mortgage rates rising to 8% in October impacted the data line, which I spoke about on CNBC recently.
Also, new home sales are notorious for big positive and negative prints that tend to get revised. We did have three negative revisions, which ran with the period when mortgage rates rose to 8%. So, if you’re confused about why the builder stocks are doing well recently, the builders were still showing sales growth in 2023, and now rates have also fallen and the Fed rate hike cycle has ended.
From Census: New Home Sales: Sales of new single‐family houses in November 2023 were at a seasonally adjusted annual rate of 590,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 12.2 percent (±15.6 percent)* below the revised October rate of 672,000 but is 1.4 percent (±19.8 percent)* above the November 2022 estimate of 582,000.
We have seen three months of negative revisions on the data due to those higher mortgage rates. Let’s be clear: the Federal Reserve is way too restrictive for housing, as the existing home sales market has shown us, with sale levels at the lowest levels ever when accounting for the working labor force. Now, with core PCE inflation running at 2% on the 3- and 6-month average, it is time for the Fed to be pro housing again.
For sale inventory and months’ supply: The seasonally adjusted estimate of new houses for sale at the end of November was 451,000. This represents a supply of 9.2 months at the current sales rate.
Housing starts aren’t booming, primarily due to 5-unit construction slowing down. However, as mortgage rates increased to 8%, the monthly supply data grew as sales slowed. However, the builders have been able to sell homes by offering buy-downs, which get more expensive as rates head higher. This is another wake up call for the Fed. Let’s build baby build!
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.
One of the things I like to do is break down the monthly supply data into subcategories. We have a lot of homes in the pipeline that still need to get built; this is why the builders are making deals to move products. Also, mortgage rates spiked this fall, so the builders are mindful of those homes that haven’t started construction yet.
Now that mortgage rates have come down, we should get more homes completed over time, and the builders will feel better about starting those homes not yet under construction.
- 1.6 months of the supply are homes completed and ready for sale — about 78,000 homes.
- 5.4 months of the supply are homes that are still under construction — about 267,000 homes
- 2.2 months of the supply are homes that haven’t been started yet — about 106,000 homes
With all the terrible takes on social media for 18 months talking about a massive amount of housing inventory going to hit the market because we have the most homes under construction, we ended the month of December with 78,000. Yes, in a country of over 335 million people and over 157 million people working, we have 78,000 new homes completed for sale. This is why I stress reading is a good thing.
Overall, we can see what happened to new home sales when rates headed toward 8%: they slowed down. The builders were trying their best in an environment with high mortgage rates. However, as the Fed rate hike cycle is over and mortgage rates have fallen 1.5% quickly, we should get more single-family homes into the economy.
After today’s inflation data, I am hoping that the Federal Reserve understands that the Fed funds rate and mortgage rates are still too restrictive. If mortgage rates head even lower, I hope we don’t see Fed presidents on TV complaining about how hard their jobs are with 6% mortgage rates. It’s time to get off that train and get back to a pro-housing stance.