Extreme increases in lumber prices have caused some people to go bearish on new home sales. Not this one! If we play a version of rock, paper, and scissors with lumber prices and mortgage rates, mortgage rates will win. Mortgage rates have a much more significant influence on the new home sales market than lumber prices, even at their current highs.
Proof of this is the recent new home sales report released by the Census Bureau. New home sales beat expectations by a lot, and all the revisions to the last report were positive.
Last month, I wrote that we should have expected new home sales to moderate after their parabolic rise.
Sales are still working to find a sustainable trend after the massive distortion in all housing data lines due to COVID-19. This recent report, especially regarding the positive revisions to the last report, tells a solid story for new home sales in 2021 as long as rates stay low.
From Census: “Sales of new single-family houses in January 2021 were at a seasonally adjusted annual rate of 923,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.3% (±18.1%)* above the revised December rate of 885,000 and is 19.3% (±19.5%)* above the January 2020 estimate of 774,000.
When reviewing new home sales data, it is wise to keep an eye on the monthly supply. When the monthly supply is 4.3 and below, builders will have the confidence to continue building. This is especially true when the 3-month average is 4.3 months or below. Currently, inventory is at four months with a three-month average of 4.06 months of supply, so it’s looking pretty good. The revisions on this report showed a lower monthly supply than in the previous month.
The low monthly supply is why builders’ confidence is high, despite the massive spike in lumber prices. As a high school basketball coach in my previous life, I know that sometimes all that matters is that you shoot better than your opponents. Don’t overthink it. Better sales plus lower inventor equals increased builder confidence.
Today, the MBA’s purchase application data was also positive by 7% year over year, even with the President’s Day holiday and the Texas snowstorm — two factors that typically hurt applications. Positive year-over-year growth is a good thing.
So far this year, our year-over-year comparisons have been against a “pre-covid” housing market. March 18 is almost here, which means year-over-year comparisons of housing data are going to get funky. If you see scorching year-over-year growth – don’t be fooled that it will be a sustainable trend.
Purchase applications in 2021 have exceeded my estimated peak rate of growth of 11%. I expected to see a trend growth rate between 1%-11% year over year, up until March 18. We are currently trending at 12.375%. The substantial purchase application growth speaks well for housing sales 30 to 90 days out.
The take-home message is that sales are strong, which will contribute to hotter home prices. Right now, we want the rate of growth to cool down.
Next week for HousingWire, I will explain why we should expect to see some purchase application data show weaker year-over-year data in the second half of 2021. There is more to this story than higher mortgage rates.