- by New Deal democrat
New home sales, which were finally updated yesterday for March (and so still are about three weeks behind their regular schedule now 6 months after the end of the government shutdown!) are perhaps the most leading of all indicators for housing, itself a long leading indicator. In fact, they are so leading that they are more of a “mid-cycle” indicator, as their monthly peak usually happens closer to the mid-point of a cycle than they end. But as I almost always point out, they have two major problems: (1) they are very noisy, and (2) they are heavily revised. Which means you must always take the latest month’s number with several grains of salt under the best of circumstances.
With those caveats out of the way, let’s take a look at yesterday’s numbers. The headlines were that sales increased sharply, from 635,000 annualized to 682,000. The median price on a non-seasonally adjusted basis declined to 387,400, a -6.2% YoY decline. And inventory declined ever so slightly, by -2,000 annualized to 481,000 units.
Here’s a more in-depth look.
First of all, home sales react to mortgage rates, as shown in the first graph below of the last three years:
As mortgage rates (red, right scale) generally declined, especially later in 2025, new home sales increased (blue, left scale). With the increase in mortgage rates over the past two months, I expect the three month average of new home sales to start to decline again.
The trend is somewhat clearer when we average new home sales quarterly (light blue line below). Although they comparatively lag a little, the signal is also distilled quite clearly from the noise by single family permits (red, right scale):
Permits had just started to pick up in the last few months, a few months after new home sales, before the increase in mortgage rates hit. But the Q1 average of new home sales did pick up a decline. We can expect this (noisily!) to continue in Q2.
The next metric to follow sales are prices, shown below historically both monthly (light blue) and quarterly (dark blue) to help smooth out some of the noise:
Prices do go down, or at least advance at a decelerating rate, late in expansions as typically higher interest rates kick in. Now here is the post-pandemic view:
We can see that prices peaked in Q3 2022 and have generally been declining on a consistent basis each quarter thereafter. Faced with a downturn in sales (due to high prices after the pandemic and then a big increase in mortgage interest rates), builders adapted to the market. As of Q1 of this year, the median price of a new home was -8.9% lower than its Q3 2022 peak. While the trend in mortgage rates before the Iran war had been downward, and might yet be reflected in a temporary firming in prices, it seems very likely that the downward trend in prices will resume with the higher interest rates, and in some cases costs of material, due to the Iran war disruption.
The final domino to fall is new houses for sale, i.e., inventory (orange in the graph below). The historical look shows the inventory ultimately always follow sales (blue) with a significant delay, and almost always have started to decline significantly before the onset of recessions:
The post-pandemic view shows that inventory did indeed peak in March and May of last year and declined since, down -4.6% as of March:
But this last graph also shows something interesting — namely, inventory stabilizing. This, by the way, is something that has also been true in the last several months for single family houses under construction (blue):
The historical look suggests that units under construction turns before inventory:
In the present case, it appears that inventory may have made a bottom a month or two before units under construction. If we go back to the long term historical graph above, inventory has typically bottomed after the end of recessions. In other words, as recessionary as housing has been for the last year, this suggested that the danger may have been passing, i.e., the economy may have dodged a bullet.
But again, if the Iran war continues to cause interest rates to be elevated, then sales will turn back down, price reductions will continue, and inventory will continue to decline.
