from census: New Home Sales: Sales of new single-family homes increased at a seasonally adjusted annual rate of 617,000 units in June 2024, according to estimates jointly released today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.6% (±14.6%)* lower than the revised 621,000 in May and 7.4% (±15.2%)* lower than the June 2023 estimate of 666,000.
The new home sales market has not collapsed, and the large public builders still have enough excess gross margin to cover mortgage rates if needed. However, we have limitations here because not every constructor is the same. We wrote this article after our last housing starts report.
So the question is, will falling interest rates help builders sell and build more homes? The ball is in the Fed’s court – they feel the same way as I do, so it’s a public policy choice at this stage.
Active inventories higher than pre-COVID-19 levels
The new home sales market does not offer millions of active completed homes for sale, but it is now back above pre-COVID-19 levels. Now, 102,000 homes doesn’t sound like a lot, but with mortgage rates at this level, builders won’t be rushing to get permits. Remember, this is not the March of Dimes; They are here to make money. Now that permits are declining for both single-family and five-family homes, the future of the construction workforce is drawing a line.
Monthly supply: 9.3 months
Inventory for sale and monthly supply: The number of new homes for sale at the end of June was estimated at 476,000 on a seasonally adjusted basis. At the current sales pace, that would mean a 9.3-month supply.
Last month’s monthly supply was revised up slightly to a lower level.
I have a builder model regarding monthly supply. In more traditional markets, when the monthly supply exceeds 6.5 months, builders will suspend issuing permits if they are unsure about new home sales. Last year they were more confident in sales and allowed licenses to grow even with high monthly supply, but this year things are less optimistic.
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.
Supply data details
When discussing the monthly supply of new homes, we never mix it with existing inventory unless we are talking about homes that are completed and available for sale. Since much of the supply is under construction, this supply does not equal the actual homes you can buy and move into today.
Additionally, we have unusual levels of housing under construction; a record high number of homes have yet to be started. So it’s no surprise that with new home sales trending downward and inventory increasing, permits aren’t being issued. Builders need to be confident they can sell these homes when they are ready.
Keep in mind that not all builders are the same; many small builders cannot afford to pay buyers for their mortgage rates. Here is the availability:
- 102K Completed Homes for Sale = 2.0 months
- 274K House under construction = 5.3 months
- 100,000 The house construction has not started yet= 1.9 months
Today’s new home sales report isn’t surprising, but it’s not the most positive news either. If this trend continues and single-family permits continue to decline, construction workers will face a higher risk of layoffs once single-family and 5-unit buildings are completed. New home sales are not collapsing, nor are we seeing a significant increase in cancellation rates. However, unless mortgage rates come down, it will become an increasingly bigger problem.
One positive today is that new home sales are at historically low levels and not at a high level like the peak we saw in 2005. This situation is more circular than that. However, not all builders have strong profit margins, and smaller builders have recently shown more concern.
