Sometimes keeping things simple makes the message more clear. I have been consistent in my stance that during the years 2008 to 2019, we had the weakest housing recovery ever. I said that housing starts would never start a year at 1.5 million until we reached the years 2020-2024. Only then would we see enough demand from the new home sales market to warrant that much construction.
This hasn’t happened yet, but the recent hew home sales report indicates we are getting there.
The Census Bureau reports: “New Home Sales Sales of new single-family houses in October 2020 were at a seasonally adjusted annual rate of 999,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.3% (±13.6%)* below the revised September rate of 1,002,000, but is 41.5% (±22.6%) above the October 2019 estimate of 706,000.”
Along with the growth in new home sales, the monthly supply for new homes has declined dramatically. This data line has always been my most crucial housing chart to follow, and it has never looked better.
Again from the Census report: “The seasonally adjusted estimate of new houses for sale at the end of October was 278,000. This represents a supply of 3.3 months at the current sales rate.”
Why is builder confidence at an all-time? Anything below 4.3 months of supply indicates that builders will have the utmost confidence to build. Higher levels of Inventory in the range of 4.4 to 6.4 months indicate slow and steady growth for housing starts, like what we saw from in the previous expansion.
If inventory breaks over 6.5 months, then the market has issues, and builders will likely stall on construction. This happened in 2018 when mortgage rates reached 4.75% to 5%. I then put the housing market in the penalty box until the supply got below 6.5 months. I warned back then not to assume that the housing market peaked, as better times were just around the corner when we would come into the best housing demographic patch ever during the years 2020 to 2024.
We spent 2019 getting rid of the excess housing supply to end the year flat in housing starts. Now, new home sales are 41.5% year over year and 20.6% year to date.
With all this hoopla, keep in mind that this data will moderate. Also, never forget this sector of our economy is very sensitive to higher mortgage rates, so if the economy gets better, it will impact the new home sales market — all housing data moderates to a more normal demand trend and the recent home sales especially.
The housing market over time is not like toilet paper sales. It doesn’t go parabolic during a hoarding session. Monthly supply level trends are more useful than any single report to gauge the new home sales market’s strength, and it looks great now as the three-month supply trend is currently at 3.33 months.
Unlike March and April, purchase application data is holding up very well, even with the rise in cases. I talked about this recently on HousingWire. Today’s report from the MBA showed a 19% increase in purchase applications year over year — down from last week’s increase of 26% year over year. This will be the 27th straight week of year-over-year growth.
Some were concerned that the recent massive spike in COVID-19 cases would dampen demand like it did in March and April, but we are in a better economic spot now than we were back then. We also now believe that Americans who bought homes during the worse weeks of the pandemic didn’t have any competition and were not outbid.
The entire housing market has changed since that period. While the growth rate can cool down during this period dealing with the spike in Covid19 cases, it won’t be like what we saw earlier in the year.
I wish everyone, including my housing bubble-boy friends, a wonderful Thanksgiving. We have been through a lot as a country and lost too many fellow Americans due to this virus. The vaccine is around the corner with better treatments, so stay smart and safe and enjoy the holiday.
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