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Politics & MoneyReal Estate

Why you shouldn’t worry about the drop in new home sales

Inventory increased to 4.8 months, which should prompt more homebuilding

new home sales HW+

Today the Census Bureau reported that in February 2021, new single-family home sales were at a seasonally adjusted annual rate of 775,000.

This was a big miss from estimates. Although sales were up from 716,000 compared to sales in February 2020, they were 18.2% (±13.9%) below the revised sales in January 2021 of 948,000. The miss in sales immediately garnered comments about housing affordability.  

New home sales are impacted more by increases in mortgage rates than an existing home. Mortgage rates, although still historically low, have risen recently. Higher mortgage rates at some point are going to quell any construction boom, despite what you may have heard from other analysts. But today’s new home sales number is largely due to sales just going back to trend after a parabolic rebound from the COVID shutdowns. Since the end of summer 2020 I have been warning that housing data would moderate and that is what we are seeing in the report today.  

To illustrate, the chart below shows that new home sales had a parabolic spike in 2020 followed by the numbers going back to the trend. The data is still waffling – as it finds a stable sales range. This is a continuation of the story for the new home sales market in the previous cycle when we had slow and steady growth. Remember too that we can assume that the numbers in this new home sales report won’t stick. All significant deviations from the estimated sales, either positive or negative, revert to the trend. We are getting closer to a stable level to make a better diagnosis of each report. However, we aren’t there yet and I caution this about all economic data as well, not just housing.

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