New home sales rose more than the most recent month Population census reports, but homebuilders are now facing a supply crunch – their inventory is growing. This is the reason why housing starts are at a recession level today.
Monthly new home sales have been stagnant for the past two years. When mortgage rates go down, sales improve, but it becomes more challenging for builders and buyers when rates go up. Housing starts and permits are slowing today while the number of completed units from homebuilders is increasing. This situation threatens the construction of 2025. I wrote about why this presents the risk of a housing recession The Federal Reserve.
As mortgage rates continue to rise along with supply, this does not mean that housing starts to grow in any meaningful way. Is 2025 the first year we start losing housebuilding jobs? Earlier this year, mortgage rates were trending at 7.50%. During that time, we received one negative monthly employee report. Recently, mortgage rates dropped back to 6% but are now up over 7%.
This issue goes beyond just housing. With private income growth falling and mortgage rates rising, there is increasing pressure on the Federal Reserve and the unemployment rate for next year, especially if we see job losses among residential construction workers. The historical trends in economic cycles are clear: when housing and housing permits begin to decline together, housing workers tend to lose their jobs at some point in the future, usually before the economy enters a recession.
As shown in the chart below, the Fed has repeatedly ignored this red flag in previous cycles.
Let’s dive into today’s report and reveal where we stand in this cycle. It’s always good to see how the pieces fit together and what insights we can glean from the latest data.
From the Census: New Home Sales: Sales of new single-family homes in November 2024 were at a seasonally adjusted 664,000, according to estimates released jointly today by the US Census Bureau and the Department of Housing and Urban Development. This is 5.9 percent (± 18.6 percent)* above the revised October rate of 627,000 and 8.7 percent (± 19.3 percent)* above the November 2023 rate of 611,000
.The charts below provide insight into the current state of the new real estate market. New home sales appear to be broadly in line, as inventory grows and homebuilders experience lower price pressures, particularly in the South.
Builders have been managing the situation by offering low loan rates, but this strategy could be costly as their profit margins are squeezed. It doesn’t help that mortgage rates have risen recently. Unlike the existing home sales market that has been operating since record lows, the new real estate sector hasn’t experienced that much of a downturn, so the bar is high here.
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We currently have 120,000 completed units available for home builders to sell. Although this number may not seem large, it leads builders to be more cautious about issuing new permits. Additionally, builders still have a large backlog of homes, so they need more clarity on mortgage costs before they decide to issue more building permits for single-family homes.
Although new home sales saw a significant increase in the latest report, there are signs of trouble ahead, especially if mortgage rates continue to rise. Over the past two years, new home sales have outperformed the existing home sales market. Even the latest ones An MBA Purchase order data shows year-over-year growth in new homes. However, the focus here is on supply and margin pressure.
Why is this important? Because home builders aren’t the March of Dimes – they’re watching their gross margins and upcoming sales. It makes sense why housing starts and permits are at recession levels: Builders were right not to issue more permits for single-family homes and apartments because there would be more gross margin pressure on the horizon if they did.
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