New home sales have been one of the brighter housing stories since the home sales crash in 2022 — as we can see in the chart below, new home sales have been able to grow since then. This is one reason why the homebuilder stocks have done so well since November of 2022. The mistake some people made here was that in 2021 and 2022, some people believed housing was overbuilt and lacked the demographic demand to get sales to rise from such low levels in 2022.

When we take a more extended look at new home sales, we aren’t working from an elevated level — slow and steady wins this race. We have to remember the builders are growing sales because they can live in a sub 6% mortgage rate world, not a 7%-plus mortgage rate world like the existing home sales marketplace.

However, higher mortgage rates are already impacting the builders confidence like they did last year. We have seen a halt to the builder’s confidence data, which is more representative of smaller builders who don’t have the same type of profit margins to pay down rates for their buyers.

So the question is: Will higher mortgage rates impact new home sales in the future?

The short answer is yes, because as mortgage rates were headed toward 8% last year, we saw a slowdown in new home sales as even this sector can’t hold off the financial conditions getting much tighter for housing. Of course, this marketplace is much smaller than the existing home sales marketplace, which is in the third calendar year of the lowest home sales ever. More on that topic and why existing home prices are still up here.   

Now, the builders can mitigate the damage of higher mortgage rates and prevent home sales from dropping to the lowest level of sales ever (which was in 2010 at 305,000.) Still, if rates go much higher, the builders would need to get more accommodating in their pricing and rate buydowns, which means single-family permits should be falling. That was the case in the most recent housing starts report. Already, 5-unit permits are at the COVID-19 recession lows and single-family permits dipped for the first time in a while.

Now, we all must remember the builders aren’t the March of Dimes; they’re here to make money and the active inventory of completed units is back to 89,000. Yes, you read correctly — we have 89,000 completed new homes for sale! But the builders will halt permits in a second if they don’t think they can sell these homes once they’re completed, so we might be in the early stages of seeing a decline in single-family permits, like we saw in 2022. Remember, even during the housing bubble crash years, this data line didn’t reach 200,000.

So, overall,  new home sales did beat estimates, but the revisions were all negative for the previous three months. The monthly supply of new homes is still at an elevated level of 8.3 months, as we can see in the chart below.

Mortgage rates have increased recently, and we’re seeing growing inventory in the builder’s main competition, existing homes. So, this is something we all need to keep an eye on because one of my recession flags, the last one that needs to go up again, is that the permits and housing starts fall, leading to job losses among residential construction workers. So far, that hasn’t happened, but as you can see below, it’s a staple event that occurs before every recession.

For now, the economic cycle is intact, but we want to connect the dots so we can be the detective and not the troll. We want to keep close attention on this data line going out the next few months