Today, new home sales were slightly below expectations. The three-month revision is positive, but a striking piece of data shows why single-family permits have declined for three months in a row. The total active inventory of completed and pending new homes is now above 2019 levels. That means some builders will be more cautious in issuing permits if they don’t think they can sell the homes they sell.
Currently, 5 sets of licenses are at COVID-19 recession levels. If this trend continues, workers building these units risk losing their jobs once they complete the projects. I recently discussed this issue on the HousingWire Daily Podcast . However, new home sales are still on an upward trend from their 2022 lows, and new home purchase application data are still growing. So why are we talking about a decline in single-family residential permits? Builders are not a march of dimes; they are a group of people. They are here to make money!
from census:New Home Sales: Sales of new single-family homes increased at a seasonally adjusted annual rate of 619,000 units in May 2024, according to estimates jointly released today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.3% (±15.5%) lower than April’s revised estimate of 698,000* and 16.5% (±16.2%)* lower than the May 2023 estimate of 741,000.
That’s new home sales data. Let’s examine the key data lines and inventory to connect the dots.
Active inventories higher than pre-COVID-19 levels
When you think about the United States, a country with a population of 336 million and more than 159 million employed people, the figure of 99,000 completed new homes for sale sounds like a small fish in a vast ocean. While this is true, for builders it means inventory is piling up to the point where some builders, most likely smaller ones, are reducing future permits. As the chart below shows, today’s levels are higher than those in 2019.
Monthly supply: 9.3 months
From the census: For-sale inventory and monthly supply: New homes for sale at the end of May were estimated at 481,000 on a seasonally adjusted basis. At the current sales pace, that would mean a 9.3-month supply.
Pending Inventory and Monthly Supply The number of new homes for sale at the end of May was estimated at a seasonally adjusted 481,000 units. At the current sales pace, this would mean a 9.3-month supply.
This has been a confusing topic over the past few years, as people have seen huge spikes in monthly supply and some analysts have suggested it’s 2008 all over again and that housing prices are on the verge of a historic price collapse.
The facts are this: In 2007, active inventories were 4 mega use Nar Even so, builders’ completed sales never reached 200,000 units, data shows. So, you can understand why some people are very confused when reporting this. Anyone suggesting this is playing rookie ball, as NAR’s active listing total is nowhere near the 4 million we saw in 2007; it currently stands at 1,128,000.
Supply data details
As the chart below shows, much of the new home supply is still under construction or has not yet begun. Even today in 2024, after the COVID-19 production lag, we still have a traditionally high level of housing that has not started yet and is being built. The reason is that builders have a huge backlog of orders and while mortgage rates are still around 7%, they are slowly working through the backlog to ensure that these homes are still in demand after they are completed.
We must remember that not all builders are the same; many small builders do not have the ability to afford mortgage rates for buyers. Here is the availability:
- 99K Completed Homes for Sale = 1.9 months
- 278K House under construction = 5.4 months
- 104K The house construction has not started yet= 2.0 months
I have a builder model regarding monthly supply. Now that active inventory for sale has returned to normal, the model could explain why single-family home permits have declined for three straight months. Here is my model for understanding constructors:
- When the supply is 4.3 months This is a great market for builders.
- When the supply is 4.4-6.4 months, it’s just an okay market for builders. As long as new home sales grow, they will be built.
- When the supply is More than 6.5 monthsbuilders will suspend construction.
I wrote this article about the recent housing starts report and broke down the risks for construction jobs as permits for five-unit and single-family homes are now declining together.
To recap: New home sales today were weaker than expected and at a six-month low, but the reality is that active inventory is starting to pile up. That’s important because single-family home permits are down for the first time in months. This is a negative sign for the economy, as building permits are a leading indicator of a recession.
Now, I think smaller homebuilders are being impacted more than the larger public builders, so it’s not as bad as it seems. However, smaller builders are feeling the pressure, which is why single-family home permits are down. when United States Federal Reserve Restrictions are too many and last too long; it will ultimately affect future housing production, making their fight against inflation more difficult in the coming years.
