The new home sales report today was so stellar that many people had to double-check the numbers – and I understand that. The estimates were for 623,000 but sales were 739,000This isn’t the first time I’ve looked at new home sales data, and I’m convinced these numbers are subject to downward revisions, but a hit is a hit.
There are other sources we can check to get clues about this report in advance. Here are three things to consider to get a sense of a change in direction before the new home sales report comes out.
1. Look at the direction of the purchase application survey in the new home market
Not many people know that builders have their own survey on buying new homes, which Association of Mortgage Banks Stocks once a month. This index has been falling significantly recently, but in the last report a few days ago, the index showed a clear upward trend, which means that demand has turned positive.
2. The Homebuilder Confidence Survey has a future-oriented component
The Wells Fargo The monthly Housing Market Index homebuilder survey includes a component that shows what homebuilders think about demand for single-family homes over the next six months. This index showed some weakness when mortgage rates rose, but it has turned slightly positive over the past two months. This index is biased toward smaller homebuilders, so it’s safe to assume that the larger homebuilders are even more optimistic than their smaller competitors.
3. Homebuilders have sold more new homes as interest rates have fallen
When mortgage rates fall below 7%, developers’ sales outperform the existing home market because in that environment it is cheaper for developers to lower rates even further. Things get more expensive when rates go above 7%, but below 7% we have seen demand increase recently.
Let’s take a look at the details of the latest report.
Out of census: Selling new homes According to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development, new single-family home sales in July 2024 were at a seasonally adjusted annual rate of 739,000. This is 10.6 percent (±16.5 percent)* above the revised June rate of 668,000 and 5.6 percent (±21.3 percent)* above the July 2023 estimate of 700,000.
This is a massive estimate miss. As you can see in the chart below, this revenue report has been vertical, meaning it will likely be revised downward but will still end up beating estimates. All of the factors mentioned above contributed to this miss and we also have to consider that revenues have been declining recently so we had a lower bar to beat estimates.
Inventory for sale and monthly supply: The seasonally adjusted estimate of new homes for sale was 462,000 at the end of July. At the current sales rate, this corresponds to 7.5 months of supply.
This is also a massive drop in monthly supply, which is 100% revised upward, but will still be a positive drop. This is critical because if we want to build a lot of homes in the next few years, builders will need to sell more homes.
The number of units completed and for sale has changed little, and this data is about average for builders. Builders aren’t giving people a lot of vacant homes to choose from – they sell homes as a commodity, so they manage their supply well. That’s why housing starts and building permits are back to recession levels today.
All in all, this is an excellent report. I know this report is being revised downward, but it is exactly what we needed because it shows the value of lower mortgage rates. If we are going to build a lot of homes, we need to have demand for them, and lower mortgage rates will be the key variable in getting single-family building permits to stop declining and start rising again.
