As expected, today’s “New Residential Sales” report matched the other weak measures: The pessimistic home builder survey results, the declining real (inflation-adjusted) median sales prices, the low lumber prices.
The only bright spot is the home builder stock price run-ups to new all-time highs. Or is that mismatch a sign of excess investor optimism?
However that shakes out, here are the uninspiring fundamentals:
New house sales
Note that the next six months are weaker than the first six. That is a strong seasonal shift that “seasonally adjusted” data attempt to hide. But the reality is that home builders gear down during the long period.
Home builder inventories
Home builders are normally very sensitive to their stock of “new houses for sale” inventories. They tend to average about six months of sales. Now, though, they have been carrying about nine months supply, a very significant 50% overage. Therefore, expect construction to get trimmed doubly: for the seasonal sales decline and for the readjustment of the high inventories.
New house sales prices
After rising about 30%, nominal prices have stagnated. Adjusted for inflation, the prices are actually declining. Thus, another sign of a weakening new house market.
An ignored confirmation: Lumber prices
Inflation-adjusted lumber prices are back to their 2020 Covid lows. That is another important sign of slack home building.
The bottom line – Remember the importance of home building
New house construction is an important economic activity that boosts other industries. It also reflects the state of potential home buyers. Therefore, the weakening we are seeing carries the risk of a recession ahead.
Why? Because, despite the Federal Reserve assurances of having tamed inflation, prices continue to compound higher, eating into savings and income and budgets.
What about the Fed dropping interest rates? If it does so, mortgage rates are unlikely to follow suit. (See my recent article, “Home Builder Stocks Are At Risk.”)
Read the full article here
