Will the Federal Reserve pivot in time to save construction workers? We have discussed this topic for some time now because, for the first time in a while, single-family permits are falling and 5-unit permits are already in recession. This is key because, traditionally, residential construction workers are the first to lose their jobs before every recession since higher mortgage rates hit housing first.
Now that new home sales are trending lower, with fewer permits, are we getting closer to the end of this cycle? New home sales aren’t collapsing but they’re not growing anymore either, so the ball is in the Fed’s court now.
From Census: New Home Sales: Sales of new single-family houses in June 2024 were at a seasonally adjusted annual rate of 617,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.6 percent (±14.6 percent)* below the revised May rate of 621,000 and is 7.4 percent (±15.2 percent)* below the June 2023 estimate of 666,000.
The new home sales market isn’t collapsing and the big, publicly traded builders still have enough excess gross profit margins to pay down mortgage rates if needed. However, we have limits here because not every builder is the same. We wrote about this after the last housing starts report.
So the question is, will rates come down to help the builders sell and build more homes? The ball is in the Fed’s court — they’re seeing the same thing I am, so it’s a public policy choice at this stage.
Active inventory above pre-COVID-19 levels
The new home sales market doesn’t provide millions of active completed homes for sale, but we are currently back above the pre-COVID-19 levels. Now, 102,000 homes doesn’t sound like a lot, but builders will not be rushing to the table with permits with mortgage rates at this level. Remember, they’re not the March of Dimes; they’re here to make money. Now that permits are falling for both single-family and five units, lines are being drawn in the sand about the future of construction labor.
Monthly supply: 9.3 months
For Sale Inventory and Months’ Supply: The seasonally-adjusted estimate of new houses for sale at the end of June was 476,000. This represents a supply of 9.3 months at the current sales rate.
The monthly supply in the previous month was revised to a lower level, so it ticked up just a tad.
I have a model for the builders regarding the monthly supply. In more traditional markets, when the monthly supply is above 6.5 months, the builders will pause on permits if they’re unsure about new home sales. Last year, they were more confident in sales and allowed permits to grow even with a high monthly supply, but this year, not so much.
Here’s my model for understanding the builders:
When supply is 4.3 months and below, this is an excellent market for builders.
When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.
When supply is over 6.5 months, the builders will pause construction.
Breakdown of supply data
When discussing the monthly supply of new homes, we never mix that with the existing inventory unless we’re talking about homes completed and available for sale. Since most of the supply is under construction, that supply doesn’t equal an actual home you can buy and move into today.
Also, we have had abnormal levels of homes under construction; a record-high level of dwellings have not even been started yet. So, it’s not shocking that permits aren’t being issued with the downtrend in new home sales and more inventory in the pipeline. The builders need confidence that they can sell these homes when ready.
Remember that not all builders are the same; many smaller builders don’t have the luxury of paying down mortgage rates for their buyers. Here’s the breakdown of supply:
102K completed homes for sale = 2.0 months
274K homes under construction = 5.3 months
100K homes not started yet = 1.9 months
Today’s new home sales report isn’t a surprise, but it isn’t the most positive news. If this trend continues and single-family permits keep falling, construction workers will be at a higher risk of layoffs once building is complete on single-family and 5-unit construction. New home sales aren’t collapsing,and we aren’t seeing a major escalation in cancellation rates. However, unless mortgage rates fall, it will become more and more of an issue.
The one positive spin today is that new home sales are historically low and aren’t working from an elevated level like the peak we saw in 2005. At that point, sales were running at 1.4 million, so this situation can be managed better in this cycle than that one. However, not all builders have significant profit margins, and smaller builders have been showing more concern lately.
