Tuesday, June 26, 2018

New home sales continue very positive

 - by New Deal democrat

New home sales, along with purchase mortgage applications, are the most consistently positive of all of the measures of the housing market. In fact, as I have written many times before, usually new home sales are the very first measure of housing to peak, leading even permits.

The problem with new home sales is that they are very volatile and are among the most violently revised of all data releases.

But, that caveat in mind, once again new home sales in May rose to the highest level during the entire expansion save for one month:

Averaging over three months cuts down on the volatility. Measured that way, they did make a new expansion high, as shown in the below for the last year:

May 607
Jun 604
Jul 592
Aug 577
Sep 584
Oct 603
Nov 656
Dec 655
Jan 661
Feb 644
Mar 656
Apr 660
May 669

Something new I thought I'd look at this month is the comparison between new home sales and mortgage rates. Interest rates have had a very regular relationship with permits, leading them by between 3 to 9 months.

When we do the same comparison with new home sales, measured quarterly to cut down on the volatility, we see that new home sales (which are recorded as of the date the contract is signed) react almost instantly to mortgage rates (inverted in the graph below):

Zooming in on the last 7 years, and measuring monthly, we can continue to make out the two moving more or less simultaneously, but once again the demographic tailwind has been very strong:

Even though mortgage rates have been higher YoY almost consistently for the last 18 months, they haven't had much of an effect on new home sales.

Let's also compare new homes sold with new homes for sale, measured by the same survey. We can see that the former has consistently led the latter, as the number of new houses are offered for sale continues to increase even after sales have peaked:

The amount by which houses sold exceeds houses for sale, measured quarterly to cut down on volatility, if anything has tended to peak near mid-cycle:

Here is the same metric measured monthly over the last 7 years:

The peak may have been in the 4th quarter of last year, since Q1 of this year was below that, and through the first two months, Q2 is even lower.

But the bottom line is, for now new home sales remain very positive, even while permits, as I mentioned last week, may have taken a hit from higher interest rates. I continue to suspect that it will take rates on the order of 5.25% for a sustained period of time like half a year for housing to truly roll over.