Higher interest rates upend homebuilders’ fortunes (again)

Homebuilders weren’t surprised by the better-than-expected new home sales report released on Friday, though some were a little shocked. From November 9th through early February, the future purchase requisition data was improving. Of course, that all changed quickly.

upon CNBC Even though the data was stable at 5.99% on Friday morning, it was stressed that it was gone in a blink of an eye.

Home builders are crafty people (pun intended). They move home like a commodity, not as a safe haven. Unlike some buyers, you don’t have to discuss how low the total payment for the new home you buy is. (The reason for the high cancellation rate).

To combat rising mortgage rates, builders are slashing prices and lowering interest rates to move products. They still have a lot of work to do here, so you shouldn’t expect anything good to come from the housing permit side of the economy in 2023.

new construction sales

from national census: Sales of new single-family homes in January 2023 were at a seasonally adjusted annualized rate of 670,000, according to estimates jointly released today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.2% (±20.4%)* above the December revised value of 625,000, but 19.4% (±13.1%) below the January 2022 estimate of 831,000.

As I have been stressing for months, new home sales levels are historically low and cancellation rates are not taken into account. Then the market could move in the positive direction.

This leads us to the theme of Low Housing Regulations 2023 and why we need context for our sales data. If sales are performing at high numbers, as we saw in 2003-2005, that’s another matter entirely. As you can see in the chart below, it is still below the 2000 recession level and hovering around the 1996 level. And there are far more workers than there were then.

I don’t read too much into the fact that this new home sales report beat expectations, but in the future, if mortgage rates return to 6%, home builders will sell more homes than existing homes. I can say that I have a creative way to do it. Sellers may not be inclined to do so.

Sales inventory and monthly supply of housing manufacturers

The seasonally adjusted number of new housing units sold at the end of January was 439,000 units. This equates to his 7.9 months of supply at current sales rates.

This is a positive trend. Homebuilders are working on supply and monthly supply levels are still too high to issue new permits, but we are making progress here.

However, we still need some context here. The breakdown of supply data is as follows:

  • 1.2 months of supply is active list, 68K
  • 5 months of supply is still under construction, 280K
  • 1.6 months supply Construction has not yet started. 91K

One of the most erroneous parts of the recent housing inventory story is the record number of homes under construction as builders try to flood the housing market with a huge number of homes the size of 2008. It means that there is But this is not the case. I don’t know how stocks will grow in the US.

Most of the inventory comes from the existing home sales market, compared to 2008, when there weren’t even 200,000 homes available for sale, but now 68,000.

Looking at today’s active list, I still see 980,000, Close to all-time lows despite recent heavy hit to demand. To get more inventory, more Americans need to list their homes.

As you can see in the new listing data, we haven’t made much progress here.

  • 2019- 65,868
  • 2020- 62,447
  • 2021~ 50,671
  • 2022 – 49,159
  • 2023~ 42,769

For home builders to start building new homes, I have a very simple model. My rule of thumb for predicting builder behavior is based on a 3-month supply average. This has nothing to do with the existing home sales market.This monthly supply data applies only to the new home sales market and is currently 9 Months Too expensive for them to issue new permits.

  • when supplied 4.3 Within a few months, this is an excellent market for builders.
  • when supplied 4.4 to 6.4 A few months, this is the OK builder market. As long as sales of new homes are growing, they will be built.
  • Builders stop building when supplies run out. 6.5 over a month.

As you can see, builders still have a lot of work to do before considering a new housing cycle. As such, the sector is still in recession while working through the backlog of orders. We are fortunate to have very few active listings and high value products.

So overall, yes, new home sales beat estimates, but that was in a world with low mortgage rates. Know how many purchases you need to make.

Suppose the mortgage interest rate drops below 5.75%. In that case, we will have a different conversation today. However, as part of my 2023 forecast, I believe the 10-year yield will be between 3.21% and 4.25%, or 5.75% and 7.25%, as long as the economy remains strong. As long as economic data stays strong, bond yield ranges look good to me.

The story of the housing market is about where 10-year yields go. Credit standards remain good and we don’t need to worry about credit tightening to the point of killing demand, as we saw in 2005-2008.

It will be a long struggle for home builders to get their current inventory off the books. However, we know what happens when mortgage rates drop below his 6%, so we’ll have to be patient while the Fed tries to slow the economy down fast enough to keep inflation down.

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