Friday, November 25, 2022

Have new home sales made a bottom?


 - by New Deal democrat

Hopefully you are recovering from your turkey coma today. Here’s a little late commentary on Wednesday’s new home sales report.

New home sales are noisy, and heavily revised, which is why I prefer housing permits, and especially single family housing permits, as a source of information.

But . . . on the other hand, new home sales tend to be the very first housing metric that turns. In fact, during expansions they often peak so early that they are more of a mid-cycle indicator than a long leading indicator. Here’s the comparison of new home sales with single family permits from the 1970s through the Great Recession:

Sometimes the two series peak and trough simultaneously, but not that often (1977, 1985, 1998, 2005) new home sales hit their peak a few months before permits.

Why is that of note? Here is the current expansion:

As per my comment above, new home sales peaked first. But also look at the far right side of the graph. New home sales bottomed in July and are currently at their level from last spring, while permits are still heading south.

Beware revisions, but new home sales may be signaling a bottom for the housing market, which might be correct if long term interest rates are in the process of peaking now, despite the Fed continuing to raise short term rates.

Median new home prices are not seasonally adjusted, so the only good way to look at them is YoY. Remembering as always that sales lead prices, here is the YoY% change in each:

Again, very noisy, but the overall YoY trend in prices is down. The 3 month average gain over the past year has declined from over 22% to under 12%, suggesting that new home prices are on the cusp of turning down in absolute terms.

On a more general note, notice that, having made a recession warning, I am now on the lookout for the indicators that will tell me how long and deep the recession might be, and when it might bottom out. Watching for a peak in long term interest rates is an important part of that process.