Existing Sales and New Home Starts Decline
Last week, housing news dominated the headlines. The NAHB Housing Market Index provided a near real-time read on builder confidence and was supported by the Housing Starts, Building Permits, and Existing Home Sales numbers.
Let's start by taking a look at the Existing Home Sales report from the National Association of Realtors (NAR) since existing home purchases account for about 90% of the market.
Existing Home Sales fell to about a 4.8 million unit annualized pace, down 20.2% when compared to July of last year. The annual decline in sales has led many, including NAR’s chief economist Lawrence Yun, to say that we are in a “housing recession” but let's get one thing clear - there is a big difference between the housing activity recession we are in and a home price recession.
There is no doubt that real estate activity has slowed. There were 1.31 million homes available for sale at the end of July which equates to a 3.3 months’ supply of homes. Six months' supply is considered a balanced market. The ongoing imbalance of supply is continuing to support home appreciation. In addition, there were only 748,000 “active listings” in July, meaning 43% of the “inventory” in the Existing Home Sales report is under contract and not truly available. This speaks to demand, as a normal market has 25% of inventory under contract.
The NAR report also provided some very useful information for those looking to sell their home. The average time a home spends on the market is 14 days, which is extremely fast and speaks to the opportunity for those who price their homes correctly.
The National Association of Home Builders (NAHB) Housing Market Index, contains three components that measure confidence in current sales, sales expectations for the next six months, and buyer traffic. The index fell to 49 in August, marking the eighth straight monthly decline and the first time the index has dropped below 50 since May 2020.
The decline in all of these readings - current sales, future sales, and buyer traffic - shows that builders are anticipating a further slowdown. NAHB’s chairman, Jerry Konter, furthered the sentiment in his statement, “Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders.”
Housing Starts, the start of construction on homes, plunged falling well below the expected decline. More importantly, starts for single-family homes were down 18.5% when compared to July of last year. Building Permits for single-family homes, which are a good forward-looking indicator for Housing Starts, declined nearly 12% year over year.
It's clear that completions are not keeping pace with demand but there is a silver lining! As mentioned above, supply remains tight and that supports home appreciation. We know that our current situation is very different from the housing bubble when there was an overabundance in supply and a lack of demand.
Although this week's headlines contain some important housing news in the New and Pending Home Sales reports, the information everyone will be watching is the second reading on second-quarter GDP. We'll be closely watching this GDP number, given that the first reading for the second quarter was negative, which also followed the negative final reading for the first quarter. Stay tuned for the breakdown on what these numbers will mean for the housing market next week.
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