New US home sales figures for June, released on Tuesday, were a veritable compendium of remarkable data points — a coal mine full of canaries.
The short version is simple enough: Median prices plummeted from the prior month, the 12-month rate of price appreciation decelerated sharply and the pace of sales slipped to a two-year low.
Starting from the top, new home sales fell 8.1% in June, far more than the 5.9% decrease seen by economists. The 590,000 annual pace was the weakest since April of 2020 in the immediate aftermath of the pandemic lockdowns (figure below).
June’s figures mean the rebound in May from a stunning drop in April was a head fake. Revisions lopped 87,000 off the prior three months’ prints. New home sales have now fallen in five of the last six months. The pace is well below that seen in 2019.
Tuesday’s data was the latest in a string of a very poor numbers, including a grim read on homebuilder sentiment, lackluster housing starts which showed single-family activity receding to a two-year nadir, a fifth consecutive decline in existing home sales and a 22-year low on a key gauge of mortgage activity.
Read more: Bad News Just Keeps Piling Up For US Housing Bubble
Note that consensus expected a 655,000 pace from June’s new home sales headline. So, we weren’t close. The range of estimates, from more than five-dozen economists, was 500,000 to 680,000. (At least someone was in the ballpark.)
Earlier Tuesday, data for May showed the pace of home price appreciation was still “extraordinary” (as Craig Lazzara, from S&P Dow Jones Indices, put it), albeit marginally cooler versus record highs. As I wrote in “Blistering Pace Of US Home Price Gains Seen Out Of Gas,” the dated nature of the figures and the lag between rising mortgage rates and the impact of those rates on market outcomes, suggested price gains are already less than “extraordinary,” or at least when measured against the post-pandemic bonanza. The price data accompanying the government’s new home sales report for June seemed to support that thesis.
The median new home price for last month was $402,400, the lowest in a year and down sharply from May. The price data isn’t seasonally adjusted. The MoM drop was the third largest in recorded history (figure below). Do note: I wouldn’t normally highlight the MoM change in this series. In addition to being noisy, it’s meaningless in most contexts. But, I’d argue, it’s not meaningless right now.
The dramatic surge in mortgage rates is manifesting on a delay as many buyers locked in rates ahead of the storm, but the likes of D.R. Horton are rolling out incentives to counter slowing demand in a spec market where construction isn’t under contract.
“In June, we began to see a moderation in housing demand as mortgage rates increased substantially and inflationary pressures remained elevated,” the builder said last week, while reporting results that included a guide down for deliveries and an uptick in cancellation rates.
What management (and other industry players) see in real time, the rest of us see after the fact — one month “late,” at best. June’s new home sales figures were a testament to cautious commentary and souring sentiment among builders.
More notable than the monthly price drop was the deceleration in the 12-month pace of new home price appreciation. Median prices rose just 7.4% in June from the same period a year ago, the slowest pace since November of 2020 (figure below).
Just two months ago, prices were rising at a better than 20% clip.
Average prices likewise plunged. After rising on a near 90 degree angle to almost $570,000 in April, average prices tumbled more than $57,000 from May to June. They’re now back below half a million for the first time since December.
The two-month percentage drop in the average price of a new home in the US was an astounding 20%. There’s no comparable two-month period in the data series. In fact, there’s nothing even remotely close (figure below).
The YoY pace slowed to just 6% from nearly 31% in April.
Months’ supply rose to 9.3 in June, almost triple the low seen in August of 2020. Note that months’ supply has never been this high outside of recession (figure below).
I’ve said it time and time again: America may be sitting on a housing glut which is currently being mistaken for a housing shortage.
It’s conceptually similar to the unenviable situation facing America’s largest retailers, who unknowingly accumulated tens of billions of dollars in excess inventory last year in a panicked effort to keep pace with voracious demand for consumer goods. That inventory bloat is now manifesting in retailer guide downs as demand wanes. Walmart is the quintessential example.
You may see the same thing in the US housing market. There are too many homes, if not in an absolute sense, then relative to the number of people who can afford them. Almost no one seems to realize this — yet.
From an affordability perspective, moving in the right direction. Still a long ways to go, though.
Be interesting to see what happens to property taxes as prices fall. I suspect local taxes won’t be receding anytime soon in spite of falling home values.
“America may be sitting on a housing glut which is currently being mistaken for a housing shortage.” Maybe both at the same time. Shortage in housing that buyers can afford, glut in housing that buyers cannot afford. Gap will get filled (partly) by price change.
Homebuilders have been over-earning as much as any other industry. DHI had GM% L12M 31.4% and FY2021 (Sep 21) 28.4% vs normal 20-22%, it can drop, a lot. Similar to GFC when DHI GM% went from normal 20%-ish to 27% FY2005 then 24%, 7%, -25% in three subsequent FYs. Back of envelope, and very roughly, if DHI sales -30% YOY and GM% 20%, EBIT can potentially be down -65% YOY. If -40% and 15%, potentially -90%. Potential EPS and net debt/EBITDA then is left, as they say, as an exercise for the reader.
Glut of inventory at retailers, housing cooling off rapidly, gas prices down 15% from the highs- so all the geeks expect inflation to persist huh? You going to listen to Goldman, JPM or what you are seeing with your own eyes? We have entered disinflation territory big time. Don’t be surprised when the inflation prints come down and the FOMC pauses and starts to backpedal.
Goldman and JPM expect inflation to moderate. And JPM sees a path to an incrementally less aggressive Fed. It’s CEOs and their “own eyes” who don’t. So, your gripe is with executives, not analysts.
It’s quite fascinating to see how these dynamics are playing out. The NYTimes had an interesting article a few days ago about how this pause might once again leading us back into a housing shortage. It’s not like the people who wanted housing previously disappeared off the face of the earth. I have a feeling the housing market is going to feel like a roller coaster ride the next few years and we could easily see prices reaccelerate in the next year or two if builders stop building and the Feds starts cutting rates again.
https://www.nytimes.com/2022/07/23/business/housing-market-crisis-supply.html
“It’s not like the people who wanted housing previously disappeared off the face of the earth.”
Plenty of people want Ferraris too. I’ll say this as many times as I have to say it: People can’t buy what they can’t buy. There’s a threshold beyond which people literally cannot afford it. Not in the traditional/colloquial way that we’re used to talking about people not being able to afford things, but rather in the sense that for the lowest income quintiles, the total amount of money coming in on a monthly basis is insufficient to cover a mortgage payment, even if those households stopped eating, driving, showering and using electricity. They can’t line up the financing on a home anymore than you or I could line up the financing on a take-private deal for Twitter. It literally isn’t possible for some folks, and that group of people is growing.
Right, I have no doubt we are in the midst of a pullback in housing because the rising rates have combined with price appreciation to reduce the amount of buyers that can afford a house under current conditions. I’m also confident that a lot of buyers are sitting on the sidelines with the expectation that prices will come back down.
The irony is that these conditions could very well lead to a situation where supply is increasingly constrained over the next few years and prices reaccelerate as rates come down and demand for housing from both investors and owner-occupants continues to grow (people need a place to live). If we’re using car demand analogies, I’d say Tesla is more appropriate, and although the average person can’t afford a Tesla, there are still a lot of people out there who can 🙂
I agree, H, that certain groups of Americans are growing in number. There is no reason why 0.1% of the US population making more than $1 million per year cannot pay a wealth tax.
A banking buddy of mine retired and moved to Florida, where he kept a second home for years. Two years ago, he bought a once grand fixer-upper on a lovely inlet that leads out to the ocean near Fort Lauderdale. While fixing up the new place, he readied his second home for sale and the market exploded. His little 3-bedroom fetched 100+K over his ask.
He moved into the fixer-upper about nine months ago. He reckons that the investment in the work on his new place, combined with inflation, has largely paid for the labor and materials he funded to fix up the house. As he might say, timing is everything.
I understand why people pull back on spending when the economy gets iffy. But the chart you shared above (“the Roof is on Fire”) shows what a strong downturn in housing really looks like, and the impact it has on pricing power, as seen in the time between 2008-2011. I don’t think we’re going into such a serious downturn yet. I hope not. But for some people, even the current downturn can yield serious difficulty.
I don’t believe we’ll be repeating 2008. The volume of mere money is not the strength of our economy. After all, the Chinese are “strong.” They have piles of yuan (and gold, and dollars) and a lot of influence. But they’re clamping down on individual businesses and capitalist tendencies in their economy.
I read a story yesterday in Bloomberg that suggested the Gen Z population is giving up in China. They’re feeling dejected, underemployed, and have lost hope of gaining wealth. Also, the CCP doesn’t seem to care one iota about the Chinese people. The banking crisis in China is destroying the wealth and confidence of affected banking customers.
From the US perspective in recent months, the Chinese have become awkward trading partners. They’re not handling covid well. And their management has only made the supply chain more challenging, and exacerbated price increases for US consumers in the process. China, to boot, is also sympathetic to Putin in regard to the war in Ukraine.
If I may expand on your point a bit, the volume of wealthy Americans and the volume of Americans barely getting by or living in vehicles or tents are both growing dramatically as we speak. Unlike my Florida friend, I have other friends who elected to live out their days in an RV, which, they felt, was the best they could do. But I know for a fact that these friends didn’t have other viable choices. And neither could they enjoy even thinking about the possibility of financing a home in Florida.
I don’t at all see why Peter Thiel and Elon Must can’t pay at least a minimum income tax. Warren Buffet understands this need and has begged the government to raise his taxes for years. I admire Buffet and I wish the government would listen to him. If such a tax were collected, how might it be used is an important question, perhaps for another time. But I’ll say this: as inflation dramatically increases, social security grows in parallel (by law). And social security is not an unlimited resource.
H-Man, duly noted the housing run is over. At this point we simply deal with the aftermath, which is bleak if you are a seller. Time to lick your wounds and move on.
Based on a family member’s home search, certain desirable areas in large west coast cities are not yet seeing the price declines that are indicated by the national averages.