June new home sales, prices, and inventory are more evidence for a subpar housing equilibrium
– by New Deal democrat
In last month’s note on new home sales, I concluded that “This is all but unique. Historically a recession will not occur until inventory turns down again. But to reiterate, housing has been recessionary for a year, and yet no recession has occurred.”
Earlier this month, I described the housing market as being in a subpar equilibrium, with sales, construction, prices, and finall inventory moving more or less sideways – but at a level of building not nearly enough to meet the needs of the millions of mainly younger potential buyers who are unable to move out of apartments or maybe even their parents’ home.
This morning’s new home sales report for June was yet more evidence for both of the above theses. Sales, prices, and inventory all generally stayed on their recent trend level.
First, sales increased 10,000 on a seasonally adjusted basis to 628,000 annualized. Because new home sales, while perhaps the most leading metric in the housing market, are very volatile and sharply revised, below I also show the much more stable, if slightly less leading, single family permits (red, right scale):
Single family permits have been stable for a year. Meanwhile single family home sales have downshifted slightly (by about 5%) this year. In June sales were down -5.6% YoY.
The dynamic is similar in median prices, which declined -$13,700 to $398,300 on a non-seasonally adjusted basis:
This continues the very slow declining trend in new home prices ever since 2022, down -2.7% YoY in June. By contrast, repeat existing home sales as typified by the FHFA index (red, right scale) have continued to rise at a very slow pace (currently up less than 2% YoY). The difference is because builders of new homes have been able to cut lot sizes, square footage, and amenities to make their homes more affordable to potential buyers, whereas those selling their existing homes obviously cannot. Since, as noted above, this series is not seasonally adjusted, here’s the YoY comparison:
Finally, inventory has also stabilized, down only -1,000 in June. This has been almost completely stable since last September:
For the past few years, I’ve been repeating that prices follow sales, and inventory follows prices. Inventory has historically been the last shoe to drop before a recession; but as shown in the below historical graph, only once in the past 60 years has a period of stability about this long been shortly followed by a recession, in 1991 – and in that case, inventory declined again for several months before the recession:
Otherwise, a bottoming in inventory is something we typically see towards or even after the end of a recession.
So, to sum up and repeat: unless inventory turns back down, it is not forecasting a recession. With sales relatively stable and prices slowly deflating, the new home market is meeting the existing home market in a equilibrium, which is likely to remain unless something significant happens upstream, like an increase in mortgage rates back to 7%, possibly driven by a Fed rate hike.