New Home Sales Are Worse Than What They Are Saying

Sales of new single-family houses have been pushing new lows for months.

At a seasonally adjusted annual rate of 632,000 houses, they were down 5.8% from the already low levels a year ago, and down 37% from two years ago.

These sales are based on signed contracts between buyer and homebuilder, and they’re no indication of how many of those deals actually close. 

Cancellations are on the rise

And those sales that actually close are far lower amid a huge wave of cancellations. Homebuilders have been lamenting those cancellation rates for months. But those cancellations are not reflected here. We’ll get to them in a moment.

The cancellation rates vary substantially by region: In the Southwest, the cancellation rate spiked to 45%. Nearly half of all contracts signed are then canceled! This was up from a cancellation rate of 9% a year ago. In Texas, the cancellation rate spiked to 39%, up from 12% a year ago.

This kind of huge spike in cancellation rates renders the sales-contract signings data a practically irrelevant figure because a canceled contract is no longer an actual sale (chart via Rick Palacios Jr., John Burns, click to enlarge):

That is why we seeing new home inventory increasing

Supply of unsold new houses has been in the 8-10 months range since April, due to the combination of low sales and the surge in inventory. Supply in October was 8.9 months, Housing Bust 1 levels.

But supply is figured as how many months it would take to sell the current inventory at the current rate of sales – but the current rate of sales is based on contract signings, and those contracts are getting canceled at record rates, and the fact that sales keep falling through is fueling the relentless surge in inventory.

Drop in Traffic

Homebuilders reported plunging traffic of prospective buyers of new single-family houses, according to the National Association of Home Builders last week. Its index of Traffic of Prospective Buyers has plunged for eight months in a row and in November fell below the May 2020 level.

Beyond the lockdown-low of April 2020, it was the lowest since 2012, during Housing Bust 1. But this time, the descent has been far faster than during Housing Bust 1

Home Builders squeezed due to inflation . . .

Construction costs of single-family houses – excluding the cost of land and other non-construction costs – seemed like they’d peaked in June, and then the spike slowed or stalled, and on a year-over-year basis, the spike backed off from a historic record of 18.3% in June to 16.7% in August. But then it started spiking all over again and in October hit a new historic record of 18.4%. This inflation will continue to dish up surprises, just when you least expect it.

Leave a Reply

Your email address will not be published. Required fields are marked *