Markets were treated to another black swan-type event Tuesday, courtesy of a wholly anomalous beat on US new home sales (of all things).
The 685,000 annual pace for August topped every estimate from six-dozen economists. Consensus was 500,000, making the actual print a seven standard deviation event.
The highest estimate was 620,000, which seemed laughably far-fetched. I suppose we can declare that forecaster vindicated. The jump from July’s pace was an astounding 28.8% (figure below).
Sales had fallen in six of the previous seven months, and not by a little bit either. July’s pace was the slowest since 2016.
The figures came on the heels of mixed data on starts and permits, and what I described as a stable read on existing home sales, which came in better than forecast for August despite notching a sixth straight monthly decline. Homebuilder sentiment, by contrast, is unequivocally dour.
August’s read on new home sales was astounding. It counted as the third-largest monthly increase in history (figure below).
Notably, last month’s pace, as initially reported anyway, was virtually unchanged from the same month last year.
Mortgage rates did drop nearly a full percentage point from the peak in June to the local lows in early August. Subsequently, rates surged anew alongside a brutal selloff in Treasurys and renewed weakness in risk assets.
The pace of price appreciation continued to fall. Although average new home prices loitered above $520,000, median prices dropped back below $450,000 to $436,800. That represented an 8% gain from August of 2021, the slowest pace since November of 2020 (figure below).
Data out earlier Tuesday showed the pace of annual home price appreciation across the country decelerated the most ever from the prior month in July, while separate data showed a surprise monthly decrease.
Frankly, it still feels like the Fed needs to turn the screws a little tighter. The average (or “median,” if you like) American can’t afford half-million dollar houses, or at least not on any commonsense definition of the term “afford.” It’s become obvious to me over the last two years that my definition of “afford” is different from everyone else’s, but even adjusting for that, and while conceding that there are all manner of metrics that purport to show why I’m wrong, I’d suggest that in order to buy a half-million dollar home comfortably, you need six figures for a downpayment and a six-figure income. I don’t think that’s debatable. Most Americans don’t make six figures, let alone have six figures in the bank. So, if they’re buying half-million dollar homes, they’re stretching. That’ll come back to haunt them, as sure as night follows day, with potential ramifications for the economy at some point down the road.
Apparently, none of that deterred buyers last month. Or at least not according to the initial read on August new home sales. Months’ supply plunged to 8.1 from 10.4 in July. That was due to the torrid pace of buying. Houses for sale rose to 461,000.
It’s hard to take the figures seriously. If they’re even a semblance of accurate, the Fed needs to push mortgage rates dramatically higher, because plainly, any reprieve on rates or prices risks reigniting a market that desperately needs to cool.
Baby boomer parents are making the down payments. The wealth transfer effect is supporting housing.
That’s an interesting thesis. It’d suggest a lot of lucky Millennials with parents willing to hand over $100k, though.
We’ve seen a lot of that in our customer base. It’s even led to some grumbling from our service team. But they are top 3% types, so it is a long reach to extrapolate that to the broader population.
It’s an interesting dynamic that frustrates me to no end. I would suggest there are a lot of lucky Gen X’ers out there as I know several 45-55 year old’s receiving property/houses. Conversely, this Gen X’er is supporting boomer parents. I feel like a unicorn in a veritable sea of flowing pots of gold only others have access to.
Perhaps they are doing the wealth transfer a bit early – boomers I think instead of passing all their wealth through probate and wills are probably doing smarter things like living trusts and possibly even maxing out the gifting to family for tax purposes on the boomer side, as well as helping buy a new home (which everyone “knows” is a “good” “investment”) for their kids while being able to see the happiness and enjoyment on the kid’s faces.
It does feel like the last gasp of the people getting to hold the bag though. I agree with you that housing is too overpriced for most Americans to afford – and renting is decidedly not going to be cheaper than buying, at least while the market rate for rents can get away with it. Everyone is tightening the screws on everyone down their pyramid, landlords to renters, employers to employees. Who wants to work for these wages when they rise less than inflation anyway, and the jobs aren’t getting any better, if anything I think they’re worse, which is why there’s so many job openings per unemployed person but the unemployed still don’t care?
It seems like every market is dislocated in a weird way, and starting to correct, but each shift makes everyone else move a bit.
I wonder what % new home sales are to cash buyers, private equity who see property as a better way to preserve wealth with a real asset and a rental income stream…. when inflation is rising and stocks and bonds are losing value.
I recall cash buyers have recently accounted for been between 15-18% of the total.
Perhaps that % is starting to trend up?
the new TINA?
So if these “Lucky Millennials” can’t make their payments, because the economy and home prices crash, their parents are potentially out six figures? Yikes!
How does one discern a true cash buyer from one who puts in a contract as a cash buyer to win the del but then takes out a mortgage? To me most cash buyers are boomers paying cash when downsizing because they have the nest egg to do so.
I don’t know how the new homebuilding market works, but is it at all possible that builders are taking excess inventory ‘off the books’ with some accounting shenanigans, so not really sold, just moved from one balance sheet to another? Or is this data solely from tax rolls or otherwise vetted as real sales?