With new home sales growing since 2022, why are housing starts at recessionary levels? Well, it's a complicated story if you don't know how the homebuilders operate, and not all homebuilders are the same.
The big publicly traded builders have money to pay down mortgage rates and manage their pipelines better than smaller homebuilders. However, even with that reality, when mortgage rates were at 7.50% earlier in the year, housing starts and permits were heading lower, single-family permits were heading lower and the builder's confidence was falling. We had no growth in residential construction work hiring earlier in the year when rates were higher.
Then mortgage rates fell from 7.5% to nearly 6%, and things started to look better for the builders. However, that was short-lived; mortgage rates are closer to 7% again. I recently raised this concern about housing construction and new home sales in an interview on CNBC.
However, let's examine today's new home sales report to see what we can learn and why I am concerned about housing starts.
From Census: New home sales: Sales of new single-family houses in September 2024 were at a seasonally adjusted annual rate of 738,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.1 percent (±14.7 percent)* above the revised August rate of 709,000 and is 6.3 percent (±18.6 percent)* above the September 2023 estimate of 694,000.
Below are some charts showing the data lines related to the new home sales report. As you can see, monthly supply is down and new home sales have risen, so what is the issue? Active inventory is growing here, but it isn't the total active inventory we see in the chart below that makes the builders nervous -- it's the amount of completed units for sale with rising mortgage rates.
In the new home sales report, we have about 1.8 months of supply of completed units for sale; this doesn't sound like a lot when you consider that only equates to 108,000 homes, but for the builders, this is their peak comfort zone. With affordability, insurance, and property tax concerns in southern states like Texas and Florida, inventory is picking up more in those areas -- which doesn't seem like the backdrop to be shelling out a lot of housing permits for construction. I discussed this recently with the previous housing starts report.
This would be fine if mortgage rates were 6% or lower because big or small builders could comfortably sell homes. However, this is no longer the case, and if you don't have gross profit margins of over 20% to buy down mortgage rates, it will become more challenging to sell new homes now.
Today's report shows that 258,000 homes are under construction, which amounts to 4.2 months of supply, a high level historically. There are 104,000 homes that haven't even been started yet -- this amounts to 1.7 months of supply and is roughly at all-time highs.
As seen in today's report, the builders still have a larger-than-average backlog. With higher mortgage rates, they're not in any hurry to issue a lot more housing permits for apartments and single-family homes. If mortgage rates were at 6% or lower, this wouldn't be a big concern, but things have changed quickly with mortgage rates.
The new home sales report beat estimates today, but the last three months were revised lower in sales, and this is without a recent spike in mortgage rates. We are a country without a pro-growth housing policy, and if the big homebuilders didn't pay down mortgage rates lower, we would have fewer new home sales today and fewer housing starts. For a country talking about building millions of extra homes into the marketplace, a big dose of reality is looking us in the face and laughing at us.