New home sales make 3 year high as price pressures for existing homes abate and inventory increases

 

  - by New Deal democrat

Since new and existing home sales were released just one day apart, I figured I would report on both of them together; in particular because for well over a year I have been looking for, and tracking, the rebalancing of this market, where a lack of inventory of existing homes cause prices for both to skyrocket. Since then new home prices have backed off, while the price of existing homes has remained elevated.

In April there were further signs of this rebalancing.

Let’s begin with new home sales, which are the far more important metric for forecasting purposes. 

In ordinary times, new home sales are important because while they are very noisy and heavily revised, they are the most leading of all housing metrics. Thus they can tell us about the underlying upward or downward pressure on the economy going forward one year or more. 

By way of background, remember that housing responds first and foremost to mortgage rates, and since those have been rangebound generally in the 6% - 7% range for 2.5 years, so have new home sales in the range of 611,000-741,000.

In April, new home sales increased 10.9% month over month to 743,000, just beyond the top of the above range, making a new 3 year high, from a sharply downwardly revised March. In the below graph I also show single family permits (red, right scale), which lag slightly but are much less noisy:

Both demonstrate the recent range bound behavior, with permits slightly lagging, and new home sales making the new high mentioned above.

Over the same 2.5 year period of time, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. This continued last month, as on a non-seasonally adjusted basis, while the median price of a new single family home increased 3,500 to 407,200, on a YoY basis (not shown) it was down -2.0%:

Finally, recessions have in the past happened after not just sales decline, but the inventory of new homes for sale (red, right scale) - which also consistently lag - also decline (as builders pull back:

While the inventory of houses for sale did decline -3,000 from March’s post-pandemic high to 504,000, it remains 8.6% higher YoY (gray, left scale), on trend with the YoY increase in inventory for the past year:

I would need to see a significant break in that YoY trend for me to be concerned that the peak is in.

Now let’s turn to existing home sales. 

In general they are not that important for forecasting purposes, since they have much less economic impact than new home sales, because the main effect is simply a change in ownership. But (as I’ll include in a graph below) there has been an ongoing shortage of housing for over a decade, which was only exacerbated by the pandemic. So I mainly look at this data for evidence of a rebalancing of the market.

Like new home sales, the sales of existing homes have been rangebound for the past 2 years, in reaction to mortgage rates remaining in the 6%-7% range. In April they remained within that range, at 4.00 million annualized on a seasonally adjusted basis. The below graph shows the last 10 years, showing both the immediate post-COVID surge and the low but rangebound trend since:

Now let’s look at inventory. Note that the secular decline in this began well before onset of the pandemic. Unlike sales, this series is not seasonally adjusted, so it must be looked at YoY. In April inventory continued to climb from its 2022 Covid lows, to 1.450 million units, a 20.8% YoY increase, and only 1,000 units lower than April 2020:

Nevertheless inventory remains well below its pre-2014 levels, which typically were in the 1.7 million to 1.9 million range, which means that the shortage still exists.

Finally, let’s look at prices. Builders of new homes are much more able to respond to market pressures, and - tariffs aside for the moment - this has continued to make new homes relatively much more attractive than the constricted existing homes market, which has had strong upward pricing pressures right through the end of last year.

The good news is that there is strong evidence that this upward pricing pressure is abating. Like inventory, this data is not seasonally adjusted and so must be looked at YoY, as in the graph below of the last 10 years:

In the immediate aftermath of the pandemic in 2021-22, prices increased as much as 15% or more YoY. After the Fed started its sharp hiking regimen, prices briefly turned negative YoY in early 2023, with a YoY low of -3.0% in May of that year. Thereafter comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of 2024, before decelerating to 2.9% in September.

Here are the comparisons since:

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

In April this deceleration continued, with a YoY% gain of 1.8%, the lowest such gain since early 2023.

This is good news, but as indicated above pricing pressures will remain until the shortage of inventory is resolved. Additionally it may reflect caution in part due to the nonsensical economic “policies” coming out of Washington.

So let’s sum up. Most significantly, both new and existing home sales reports for April showed that the rebalancing of the housing market is continuing. And the 3 year high in new home sales is very positive, even if it is a noisy statistic which may get revised away next month, because manufacturing has been flat to declining in the past three years, meaning that construction has been important in the continued expansion of the economy. This month’s reports say that (tariff-palooza! excepted) no recession is imminent.