A few months ago, I talked about a material change in the new home sales sector. The monthly supply spiked over 6.5 months, new home sales were trending negative year over year, and the HMI data (Builders confidence Index) was falling noticeably. Considering those 3 metrics, it looked like the new home sales sector peaked for this cycle. Under the title, The Housing Market Has Materially Changed… But, I wrote:
“Despite the terrible optics for the new home sales market, I caution everyone not to assume that we have hit our peak and are heading for an epic crash in housing starts and new home sales. New home sales and starts are still very low. In order to lift the dark cloud hovering over the new home sales, we will need to see the following:” “You need to see monthly supply get back down below 6.5 months and new home sales show trend growth of 640K with revisions confirming this.” “That isn’t a tall order, especially if the builders start to discount, but until this happens, don’t expect to see too much action in housing starts.
The “But” in the title to that piece was vital. With today’s report, which I am calling the best report of the cycle, we are officially out of the penalty box.
In 2018 I wrote:
“I expect to see a negative 3% to 1% growth in new home sales in 2019. The builders could discount to add some more business. I expect they will instead hope that lower mortgage rates will get them back on track for slow and steady growth instead of decreasing their margins.”
Today, new home sales were reported to be 673,000, it’s down from a higher revised March reading of 723,0000. However, the critical data line is that we are showing a positive year over year growth, with a monthly supply below 6.5 months, standing at 5.9 months currently. More importantly, the 3 months average monthly supply trend is running at 5.9 months, and the 3-month sales trend is running at 688,000.
We can officially take the new home sales sector out of the penalty box, and one of the biggest hopes for the American bears crashed today as it will be challenging now to have a noticeable faster trend decline in starts now that sales are back to its slow and steady mode.
New Home Sales
Sales of new single‐family houses in April 2019 were at a seasonally adjusted annual rate of 673,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.9 percent (±14.0 percent)* below the revised March rate of 723,000, but is 7.0 percent (±12.4 percent)* above the April 2018 estimate of 629,000.
The median sales price of new houses sold in April 2019 was $342,200. The average sales price was $393,700.
For Sale Inventory and Months’ Supply
The seasonally adjusted estimate of new houses for sale at the end of April was 332,000. This represents a supply of 5.9 months at the current sales rate.
This is the most crucial housing data line we have in America today, and it’s gotten a lot better. This is the best news for housing starts going out in years 2020-2024 because we simply had too much supply for housing starts to grow faster recently.
My articles in the last few months were specially designed to give people parameters to work with in regards to what we need to see to get housing starts growing faster again.
I am giving a heads up now to my housing bull friends on wall street and housing shops, all we did right now is get a recessionary data line, offline. If this was any other previous cycle with new home sales, HMI data and housing starts, housing peaked. In fact, a builder CEO, Sheryl Palmer, was quoted by Diana Olick perfectly showed the stress.
“The fourth quarter [of 2018], was probably, holistically, the worst quarter we’ve had as an industry since the downturn, and we ended the year with a tremendous amount of inventory,” Sheryl Palmer, CEO of Arizona-based Taylor Morrison Homes, says at CNBC’s Capital Exchange event in Washington, D.C.
Housing permits have stalled for 28 months for a reason, demand is simply too weak to grow housing starts faster.
More on that here:
While we can rejoice that the mega bearish case of this sector is taken offline, all we did is go back to the slow and steady new home sales and housing starts theme. Anything more taken from this is a mistake in my eye. Going out be mindful that 4.75% -5% mortgage rates created the major red flag for this sector. As always, keep in mind my model for the new home sales sector.
As long as the monthly supply doesn’t break above 6.5 months and sales don’t trend negative year over year we are ok. However, the low bar that the housing sector has enjoyed for years is coming to an end.
For those who have been following my buy call on $TOL that I was advocating on Twitter after the downgrade from $51 to $29 and the stock was trading below $29. I recently got out of that trade at $39 because it only had a hard time getting above $39 a share before the earnings came out recently. I am not calling a top here, but as you can see below, it made sense to take profits.
Since sales are still historically low, this sector has legs to walk, albeit, very slowly. We don’t have over-investment in this sector, which is positive for the U.S. economy. Builders can discount and provide smaller homes into the mix to help this along. Discounts and more affordable, smaller homes are being offered recently, and this will result in more new home sales and promote more single-family construction. If we see more weakness in existing home sales and increased supply, then we have a slight risk to the new home sales market going out in the future. However, to put a positive spin on things — since this has been the weakest new home sales cycle ever recorded in U.S. history, during a record-long economic expansion, new home sales have room to grow.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his own facebook page https://www.facebook.com/Logan.Mohtashami