The foundation is cracking.
That’s a housing pun. And it’s kinda good, but not great. (Regular readers know I despise clichés and obvious jokes.)
New home sales dropped 6.6% in June, the Census Bureau said Monday. It was the third consecutive monthly decline (figure below).
The 676,000 annual pace was a woeful downside miss. Consensus wanted 796,000. The range, from nearly five-dozen economists, was 700,000 to 830,000. The previous two months were revised lower.
At this point, it’s pretty clear that prices are adversely affecting demand. The median new home price jumped more than 6% YoY to almost $362,000. The average selling price was $428,700 (figure below). Both of those figures are lower compared to May. We may be starting to see the first signs of demand destruction catalyzed by sky-high prices.
There is, of course, a vociferous debate around whether ever higher prices are attributable to a lack of supply or robust demand. I find that debate to be somewhat asinine in this context. Between pandemic dynamics and record-low mortgage rates, demand was bound to overwhelm supply. But because the pandemic also created supply chain disruptions and various “bottlenecks,” inevitable supply constraints were worse than they might have been otherwise. So, this conjuncture is best viewed as… well, as a conjuncture. Not as an “either/or.”
I’ve argued that prices are bound to fall. Mortgage rates can’t go any lower. I mean, they can. But with the Fed poised to taper and with rates having already made too many record lows to count, the asymmetry is clearly to the upside. Higher rates in an environment where prices have risen astronomically is an open invitation for gravity to make a cameo.
Note that supply rose last month by 7%. Months’ supply was 6.3 in June, up markedly from 5.5 in May, and back to pre-pandemic levels (figure below).
The low was 3.5 for three consecutive months last autumn.
The headline print was a 4.6-standard deviation miss, Bloomberg’s Cameron Crise noted. “The standard explanation for tepid sales recently has been the shortfall in supply, but that doesn’t seem to be the case here,” he said, calling the numbers “legitimately bad.”
I can’t post a chart I don’t think, but one thing to note on supply is that there is a huge amount that hasn’t started yet (which continues to make available houses scarce). Here’s what I wrote on my blog about this:
In breaking down that months of supply number, we continue to see a widening bifurcation between supply of homes that have been completed (which are at record lows (the red area) around 0.6 months) versus supply not yet started which is around normal levels (green) at 5.6 months. A record 105k homes have not been started. Sold under construction remains under historical average also (blue area). This indicates a growing backlog of homes for homebuilders to work through.
Bill McBride (@calcuatedrisk) does a great job with all things housing on Twitter.
As a follow up, I agree that prices are indeed an issue, but it appears that at least as much of an issue is supply. Since March homebuilders have made clear that they are throttling back sales, so that they match more closely with construction and delivery (to avoid mismatch of prices). Not coincidentally I think, that was also the peak of new home sales.
Compared to the 3 or 4 years before the pandemic 676K is still a pretty healthy number
It occurs to me, probably naively, that ordinary people are getting more and more nervous about having to bid for houses costing 400k. They are just not equipped to handle this sort of transaction.
Seems to have gotten a little crazy lately in my part of Florida. The Zillow ‘zestimate’ for my house has gone up almost 25% in the last 6 months. The price graph has that very scary looking vertical takeoff at the end which sure appears unsustainable. My house is now worth 400% of what I payed for it in 2010 and 30 percent above what it sold for in 2005. I remember when I used to think of housing prices as stable. 🙂
I suspect a taper is imminent but in many areas it will be slight. The fact no real starter home supply exists nor is being built nor are new amounts of land being discovered close to metro areas that the floor is moving up long term in most areas. I could see prices down 10% over the next 3-5 years, maybe 15-20% for a couple years but in 10 years they’ll be up 30% or more from here. I don’t think you see prices dip back to $200-250k average ever again.
There is a lot of supply atleast in east, as the seniors haven’t moved to the sunshine states due to pandemic. Once they start moving supply will be flooded, atleast in NJ there is close 20K house which haven’t come to the supply side due to the pandemic. I think there prices will come down
Asset bubbles or inflation? You pick…Higher rates in an environment where prices have risen astronomically is an invitation for gravity to make a cameo. Beautiful writing, says it all…My experience is that selling into strength is easily done. Selling in weakness is a pain in the neck, almost as annoying as covering a short at the top..
I think the heavy fed buying a lot of mortgages was a case of fighting the last war….And of course price discovery is on hold anywhere you look….