When single-family permit demand drops significantly in 2022, we still have a large backlog of homes that need to be completed. At the same time, we also expanded the license by 5 units. Well, that’s no longer the case as 5-unit permits were already at the low point of the COVID-19 recession and now we’re seeing some weakness in single-family permits.
Future housing production at risk
I ask this question because recessions tend to cause residential construction workers to lose their jobs first. After all, higher mortgage rates tend to affect the housing market faster than other industries. Manufacturing employment and business investment also tend to be hit by higher interest rates, but our huge manufacturing spending now masks that problem. As the chart below shows, residential construction workers have not yet lost their jobs.
In terms of the monthly supply of new homes, if single-family permits and 5-unit permits come out at the same time, the construction workforce is at risk once the backlog of new homes is completed. So, let’s take a look at builders’ monthly supply data.
from census: For-sale inventory and monthly supply: New homes for sale at the end of April are estimated at a seasonally adjusted 480,000 units. At the current sales pace, that would mean a 9.1-month supply.
While the monthly supply data looks large, it’s a bit misleading in terms of total units available for sale. Today, even with a 9.1-month supply, we only have 98,000 Completed new homes for sale. Traditionally, the industry does not release all units for sale at once as this goes against the business model. Even during the housing bust, monthly supply figures never reached 200,000 homes.
To give you some perspective, this equates to less than two weeks of new listings for existing homes on the market.
I like to break down the monthly supply data into subcategories. People sometimes think that the monthly supply of new homes means that active, completed homes are available for purchase, but this is not the case. In this report:
- 1.9 Homes supplied are completed and ready for sale months – approx. 98,000 home.
- 5.3 A few months supply of homes still under construction – approx. 281,000 home
- 1.9 A few months supply of homes yet to be built – approx. 101,000 home
The 1.9-month supply of homes now stands at 98,000 units, which is roughly the start line at which builders begin to be cautious about homes that have yet to dig into the ground. That’s why the rest of the year is critical: As builders begin to wrap up work on homes under construction, they will be less willing to issue more permits.
new home sales
From the census: Sales of new single-family homes increased at a seasonally adjusted annual rate of 634,000 units in April 2024, according to estimates jointly released today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7% (±12.0%)* lower than the revised 665,000 in March* and 7.7% (±13.2%)* lower than the April 2023 estimate of 687,000.
As you can see below, new home sales are not booming; they are inching ahead from their 2022 lows. The question is, how much longer can they do this? With their profit margin capabilities, they can do some deals to close on some homes as long as mortgage rates are below 7.25%. However, as we can see in the chart below, new home sales have been flat for some time.
Smaller builders do not have this buying advantage, and as a result, we are seeing a decline in homebuilder confidence data. That’s why we need to keep a close eye on both housing starts and new home sales data. Permits for single-family homes and five-unit dwellings fell for the first time, a staple of every pre-recession cycle data run.
We care about construction workers because United States Federal Reserve They won’t turn to rates until they see the labor market collapse, and once they see construction workers actually losing their jobs, the bond market will push mortgage rates down. The bond market has twice tried to stay ahead of the recession data line, only for yields and interest rates to recover when a recession did not occur. That’s why tracking homebuilding data is critical in every economic cycle when considering mortgage rates and the current housing market’s potential for better demand in the future.
