- by New Deal democrat
In the past few months, I have described the housing market as being in a subpar equilibrium, with sales, construction, prices, and finally inventory moving more or less sideways - but simply not at an affordable level. This month I think I need to amends that, because unlike existing homes, new home prices probably *have* declined to an affordable level.
Let me start by repeating that new home sales are perhaps the most leading of all the housing sector metrics. But they suffer from being very volatile and heavily revised. So their three month moving average is more reliable as a signal.
With that said, this morning’s new home sales report for August was yet more evidence for both of the above theses. Sales, prices, and inventory all generally stayed on their recent trend level.
Sales (blue)increased 41,000 annualized to 684,000. This was the highest single month for sales this’d year. More importantly, the three month moving average was also at its highest level this year:
Further, a bottoming in inventory (red) is something we typically see towards or even after the end of a recession. And inventory, after bottoming at the end of last year has trended sideways to slightly higher this year. Were it not for the sharp upwards trend in interest rates, this would signify a recovering housing market. Keep in minds that these sales were for August, before the latest upward push in rates, so it is likely this trend meets its untimely demise in the next month or two.
Prices also continued their sideways to slightly declining trend, increasing $1,500, or 0.4%, for the month. But since they are not seasonally adjusted, the YoY% change ids most important - and it is obvious from the graph below that, July excepted, prices are at their lowest level in nearly five years:
Although I won’t bother with the graph, the YoY% price decline was -5.8%.
Where I am revising my opinion is in terms of affordability. The below graph deflates the median price of a new home by average weekly earnings, normed to 1 as of August:
Deflated by wages, the price of a new home is at its lowest level except for one month during the COVID lockdowns in almost 15 years! Were it not for 7%+ mortgage rates, the outlook for housing would be very positive. Unfortunately . . .
In summation, housing - and in particular new home sales - is not currently forecasting a recession. Last month I closed with “With sales relatively stable and prices slowly deflating, the new home market is meeting the existing home market in a equilibrium, which is likely to remain unless something significant happens upstream, like an increase in mortgage rates back to 7%, possibly driven by a Fed rate hike.” Both of those “significant things” have since happened.
We live in interesting times.
