NEW Home Sales compared to Existing home sales are currently 12% (1 out of 8). NEW home sales are a key driver to US employment both for those directly involved in construction but also to the supply chain of components necessary to build a home. Demand for homes remains strong, even as prices rise, and supply is limited the market is still incredibly fast. The average time a home spent on the market was 14 days, a record low.
New home prices tend to be ~10% higher than existing. As such, the NEW home market is mortgage rate sensitive. With the recent record run-up in mortgage rates, its impact on NEW home sales will be important.
Key historical time series national data is shown on the attached file including:
- Product sold Pre-construction, under construction, and complete
- Permits, Starts, and Completion
- Months of Inventory
Below is but one of the graphics on the attachment. The relationship between mortgage rates and NEW home permits, competitions, sales, and months of inventory is shown attached.
New Home Sales and Prices
When COVID-19 started in March 2020, Mortgage rates declined to record lows of 3.00% between Oct 2020-Feb and 2021. This brought forward demand for lending and thus lessened demand in later months. In November 2018 mortgage rates reached 5.00% and NEW home sales materially decreased. In March 2022 mortgage rates materially increased and breached 5.00% and sales immediately declined.
Sold During the Period vs. For Sale at End of Period
Over the past year, ~50% of the NEW homes sold were homes that were under construction, and <25% were completed homes. This implies there is not a lot of standing inventory available for sale. A key metric to monitor is the red line in the lower right corner. If that rises, it implies excess inventory is occurring.
30-Year Mortgage Rates and NEW Home Sales Volume
When mortgage rates have increased in the past, sales of new homes have slowed causing the New Home Sale’s Months of Inventory to spike. Note the mortgage rate spikes in Nov 2018 and April 2022—which exceeded 5.00% this is a major price point for Millennials. The run-up in rates in 2022 is unprecedented.
Single Family Residential Construction
NEW home Permits, Starts, and Completions reveal how home builders respond to changes in the market. It also gives an indication of the product development pipeline relative to new home sales (see black line). Recent decreases in Permits and Starts will lead to future decreases in Completions. A key metric to watch is how fast will completions slow relative to sales. With fewer completions, sales will decrease.
New Homes Supply For Sale and New Home Starts
When COVID-19 first appeared in the US, new home sales initially dropped and then sharply rebounded as mortgage rates hit multi-generation lows of 3.00%. With a sudden surge in sales, months of inventory dropped (blue line). When mortgage rates rose in early 2021, sales pulled back and months of inventory returned to levels that prevailed prior to COVID-19 It is important to note the large increase in Months of Inventory that occurred in November 2018. That is when Mortgage rates reached 5.00% and sales slumped. On April 14, 2022, rates exceeded 5.00%.
Bill Knudson – Research Analyst for Landco ARESC