Today, new home sales came in slightly below estimates. The three monthly revisions were positive, but one glaring data line shows why single-family permits have been down for three months. The total active inventory of new homes completed and ready for sale is now above 2019 levels. This means that some builders will be more cautious about issuing permits if they believe they can’t sell the homes they already have for sale.
Currently, 5-unit permits are already at COVID-19 recession levels. If the trend continues, the workers building those units risk losing their jobs once they finish their projects. I discussed this recently on the HousingWire daily podcast. However, new home sales are still in an uptrend from the lows of 2022, and purchase application data for the new homes is still growing. So why are we talking about single-family permits heading lower? The builders aren’t the March of Dimes folks; they’re here to make money!
From Census:New Home Sales: Sales of new single‐family houses in May 2024 were at a seasonally adjusted annual rate of 619,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.3 percent (±15.5 percent)* below the revised April rate of 698,000 and is 16.5 percent (±16.2 percent) below the May 2023 estimate of 741,000.
That was the new home sales data. Let’s examine the critical data lines and inventory to connect the dots.
Active inventory above pre-COVID-19 levels
When you think of the United States, a country of 336 million people, with more than 159 million people working, a number like 99,000 completed new home units for sale sounds like a tiny fish in the vast ocean. While that’s true, for the builders, this means inventory is piling up on them to the point where some builders, most likely the smaller ones, are curtailing future permits. As we can see in the chart below, we are above 2019 levels today.
Monthly supply: 9.3 months
From Census: For Sale Inventory and Months’ Supply: The seasonally‐adjusted estimate of new houses for sale at the end of May was 481,000. This represents a supply of 9.3 months at the current sales rate.
For Sale Inventory and Months’ Supply The seasonally‐adjusted estimate of new houses for sale at the end of May was 481,000. This represents a supply of 9.3 months at the current sales rate.
This has been a confusing topic over the past few years because people see this big spike in monthly supply and some analysts imply that it’s 2008 all over again and home prices are on the verge of a historical price crash.
Here’s the truth: In 2007, active inventory was 4 million using the NAR data, and even then the builder’s completed units of sale never reached 200,000. So, you can understand why some people reporting this are terribly confused. Anyone who implies this is playing rookie ball, as the total active listing from the NAR is nowhere close to the 4 million we saw in 2007; it’s 1,128,000 currently.
Breakdown of supply data
As you can see below, most of the new home supply is still under construction or construction hasn’t started yet. Even today, in 2024, after the COVID-19 production lag, we still have a traditionally high level of homes that have not started yet and are under construction. The reason is that the builders took on a huge backlog, and with mortgage rates still around 7%, they’re slowly moving through that backlog to ensure the demand is there when those homes are completed.
We must remember that not all builders are the same; many smaller builders don’t have the luxury of paying down mortgage rates for their buyers. Here’s the breakdown of supply:
- 99K completed homes for sale = 1.9 months
- 278K homes under construction = 5.4 months
- 104K homes not started yet = 2.0 months
I have a model for the builders regarding monthly supply. Now that active inventory ready for sale is back to normal, this model can explain why single-family permits have been falling for three months in a row. Here’s my model for understanding the builders:
- When supply is 4.3 months and below, this is an excellent market for builders.
- When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.
- When supply is over 6.5 months, the builders will pause construction.
I wrote this article about the recent housing starts report and broke down the risk to construction jobs since permits for 5-unit and single-family are falling together now.
To recap: New home sales missed estimates today and are at a six-month low, but the real story is that active inventory is starting to pile up. This is so important because, for the first time in a while, single-family permits have been falling for several months. That is a negative sign for the economy, as building permits are a leading indicator of an economic recession.
Now, I would argue that the smaller homebuilders are being impacted more than the big publicly traded builders, so it isn’t as bad as it seems. However, the stress is hitting the smaller builders, which is why single-family permits are falling. This happens when the Federal Reserve stays too restrictive for too long; it eventually impacts the future production of housing, thus making their fight against inflation more problematic in the coming years.