The Census Bureau reported new home sales for September at a seasonally adjusted annual rate of 603,000 units. According to Census estimates new construction sales fell 10.9 percent from August, putting sales down 17.6 percent from last year. Sorry Census, but you’re a little late to the party. New home sales are materially weaker than these official guestimates.
We had a good indicator from the third largest builder in the country, PulteGroup which just reported earnings this week. Pulte posted a net decline in new home orders of 28 percent compared to last year. The Mortgage Bankers Association just recorded a 10th consecutive week of declining mortgage activity. According to the MBA mortgage activity for purchases is at the lowest levels since 2001. The unadjusted purchase application index from the MBA is currently down 42 percent from the same week a year ago.
“The seasonally adjusted Purchase Index decreased 2 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 42 percent lower than the same week one year ago.”
Current Census Bureau estimates for new home sales are not capturing the cancellation rates for major builders. Those cancellation rates have jumped significantly. Estimates for new home sales are being overstated as a result. This also means that Census is underestimating new home inventory. We’ll see some updates in the coming weeks as more builders report earnings. Pulte’s cancellation rate jumped to 24 percent in the latest quarter. That was more than double the 10 percent rate they saw last year.
Inflated new home prices are still killing demand for new homes in this new environment of higher mortgage rates. Affordability of new homes has been crushed this year, so it’s not surprising to see buyers hit the pause button. It’s the only rational thing to do. I spoke with one local agent who is in the process of building a custom home, but considering walking from the deal. Not sure what they were thinking, building an expensive custom home in the middle of a Fed rate hike cycle. Oops.
A major industry analyst who works with builders noted that some boomer home buyers are walking away from earnest money deposits of $40,000 to $80,000. It’s not just first-time home buyers who are getting cold feet when it comes to this housing market reset. New home prices are still expensive. They’re expensive in absolute terms, and they are really expensive in terms of rate-adjusted affordability.
New home prices in North Texas have started falling again. Median new construction prices in Denton County Texas have fallen $45,000 from their peak in July. They are still $87,000 more expensive than median prices in January 2020 when the pandemic started.
I remember a builder sales rep earlier in the summer pitching a builder’s local inventory and telling buyers to re-work their budgets, that the record high prices were here to stay for a while. It was a classic case of denial and ignorance. Last I checked, this person was looking for another job. That’s probably a good thing. I have seen some pretty hard-core sell-side spin the last few years, but professional competence should at least be part of your skillset if you are helping people with one of the most important purchases of their lives.
New home inventory is readily available now. It has been a dramatic turnaround from the beginning of the year. Census figures show 307,000 new homes currently under construction in the U.S.. There are a record 107,000 new homes which have not started construction. There are now 55,000 completed new homes for sale, and that total should continue to grow in the months ahead. That rather large backlog of new homes should continue to put downward pressure on new home prices through the first quarter of next year.
Builders and existing home sellers need mortgage rates to fall if they have any hopes of improved demand. That doesn’t appear to be in the cards in the short term. The housing market reset of 2022 is still in play. Expect some downward revisions to the Census figures on new home sales as the reality of higher cancellation rates works through the data.
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