- by New Deal democrat
In this month’s report on new home sales for July, the most important news was at the tail end, which I’ll get to last.
As per my usual intro, while new home sales are the most leading measure of the housing market, they are very noisy and heavily revised - which turned out to be important this month - and which is why I generally pay more attention to single family permits. Still, if averaged over three or more months they are valuable indicators of the underlying upward or downward pressure on the economy going forward one year or more. Further, as per usual, sales turn first, followed by prices and inventory, which is typically the last shoe to drop.
So let’s turn to each metric in order.
With mortgage rates remaining in the 6%-7% range, sales of both new and existing homes have also been rangebound for over two years. In July that continued to be the case, as new home sales declined -4,000 (from a June level upwardly revised by 29,000!) to 652,000, near the bottom of that range:
After sales peaked, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. That trend not only continued but amplified in July, as on a non-seasonally adjusted basis prices declined -$3,400 to $403,800 (gold, right scale in the graph below). More importantly, on a YoY basis prices declined -5.9%, the steepest such decline since last November (blue, left scale):
Recall that last week the median price for existing home sales was only up 0.2% YoY. Tomorrow we will get both the FHFA and Case Shiller repeat sales indexes, which also have shown recent, seasonally adjusted, declines. If that continues, it will be the steepest such retreat since the Great Recession’s housing bust.
But the most important news was at the tail end. Last month’s initial report indicated that the inventory of homes for sale had risen to 511,000, a new post-pandemic high.
Revisions made a major difference this month. The data now indicates that the inventory of new homes for sale in fact peaked in March at 504,000, with both May and June being revised down, the latter by -9.000 to 502,000. And this month inventory for sale was reported declining another -3,000 to 499,000:
Why is this so important? Because in the past recessions have 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:
To reiterate: in the typical housing cycle mortgage rates lead sales, which slightly lead permits and starts, which in turn lead prices and housing units under construction (gold in the graph below), which finally lead employment in residential construction (blue) and housing for sale (red):
For the record, I pay very little attention to months’ supply, becuase it depends on both units sold and for sale. There does not appear to be any “magic level” that serves as a turning point, and indeed, it frequently only turns down after a recession has begun, as homes for sale decline even more than homes sold:
So, the important conclusion is: all of the important sequence of metrics in the housing sector have now turned down. The final shoe has dropped. Now we pay more attention to short leading indicators like major durable goods purchases and initial jobless claims, for signs that the turn in the bigger economy is near.
