New home sales moderating right on cue

Resist the urge to make this a sign of a housing crash

When economic data goes parabolic, there is usually a story behind it. Housing data tends to be very sticky, so when housing numbers first fell and then went parabolic in 2020, we were witnessing one of the most extraordinary swings in data ever recorded in human history.

This chart from September 2020 is an excellent example of this behavior last year.

With that said, these parabolic moves are destined to moderate, and it is important not to over-read this moderation. This has been my theme since the summer of 2020, and back in September, I wrote this article about new home sales being hot, but not bubbly.

As I wrote then: “Don’t be surprised and lose faith if we get some negative revisions in our new home sales data as these last few prints were beyond normal hot.”

With new home sales, extremely short-term moves in the headline data in either a positive or negative direction, typically gets revised back to the opposite direction. You may recall that in 2018, big headline negative prints were eventually revised slightly higher, so the headline prints weren’t as bad as they seemed. Now it’s the other way around; new home sales went parabolic, we have seen some negative revisions, and sales are just working their way back to a more normalized trend.

In time, all housing data moderates to a trend, don’t make a mistake most novice housing people make by making this anything else more than that.

When looking at new home sales, always keep your eye on the prize, and that is the monthly supply data for new homes.

When the monthly supply is 4.3, and below, life is excellent for the builders. This is especially true when the 3-month average is 4.3 months or below. Currently, inventory is at 4.3 months with a three-month average of 4.03 months of supply, so it’s looking pretty good.

Once inventory goes above 4.3 months, especially if the 3-month average is between 4.4 – 6.4 months, think of that as just OK for the builders. This would not be a stop sign – but the builders are going to be less enthusiastic.

We want to stay away from 6.5 months or higher; this is a red flag for housing, and that has happened twice since 2018. Both times, construction was pulled back. However, for now, all is good. Housing starts still have room to grow as long as new home sales are growing.

Sales and housing starts during 2008-2019 were historically low, so we weren’t working from an overheated expansion level. Once mortgage rates rise, this sector gets hit the hardest; we are far from that conversation.

On another housing topic, 2021 has started well for the MBA purchase application data. I was looking for trend growth between 1% -11% this year up until March 18. The last four weeks on a year-over-year basis looks like this: +16% +15% +10% +3%. We are averaging about 11% trend growth right now, and remember, this data looks out 30-90 days.

2021 has started well for the existing home sales market.

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