The U.S. New Home Market: As of January 2022
COVID started in March 2020 and Mortgage rates declined to record lows of 3.00% between Oct 2020 thru Feb 2021. This brought forward demand and thus lessened demand in later months.
Homes under construction are either sold prior to completion or are completed and moved to completed unsold homes for sale. The number of completed homes for sale is gradually rising which would indicate a backing up of inventory. The number of homes under construction for sale is decreasing and this will slow the increase in completed, unsold homes.
Over the past 6 months, 45% of the NEW homes sold were homes under construction while 30% were completed homes. A key metric to monitor is the red line in the lower right corner. If that rises, it implies excess inventory is occurring.
Over the past 6 months, 45% of the NEW homes sold were homes under construction while 30% were completed homes. A key metric to monitor is the red line in the lower right corner: completed homes for sale at the end of the period. If that rises, it implies excess inventory is occurring.
In the past, when mortgage rates increased, sales of new homes slowed causing the New Home Sale’s Months of Inventory to spike. Note the mortgage rate spikes in Nov 2018 and April 2022 which exceeded 5.00% this is a major price point for Millennials. The run-up in rates in 2022 is unprecedented as the Fed fights inflation. Rates had increased to 7.15% as of the 1st of November. In Feb they decreased to 6.30.
NEW home Permits, Starts, and Completions reveal how home builders have pulled back on new construction and are completing homes under construction. The blue line will decrease in the future.
Recent decreases in Permits and Starts will lead to future decreases in Completions.
A key metric to watch is how fast will completions slow relative to sales. With fewer completions, sales will decrease.
NEW home months of inventory are slowly declining as the market adjusts to higher mortgage rates.
When COVID first appeared in the US, new home sales initially dropped and then sharply rebounded as mortgage rates hit multi-generation lows of 3.00%. With a sudden surge in sales, months of inventory dropped (blue line). When mortgage rates rose in early 2021, sales pulled back and months of inventory returned to levels that prevailed prior to COVID.
It is important to note the large increase in Months of Inventory that occurred in November 2018. That is when Mortgage rates reached 5.00% and sales slumped. On April 14, 2022, rates exceeded 5.00%.