Zesteffect

The election has come and gone and so has October sales and price data for existing and new home sales. Although we had unseasonably warm existing home sales in October due to factors previously discussed we had a contextually chilly October just as the builders clocked their highest sentiment since April for the overall NAHB/Wells Fargo National and Regional Housing Market index and the highest reading at 64 for “Single family sales: Next 6 Months” since April of 2022.

As discussed in previous posts there is a very distinct seasonality to housing. The builders have a slightly different “season” as they are driven more by picking up the dregs of the existing home market.

Source: Census and NAR

Typically, new home sales peak in March while existing home sales peak in June. The average # of new homes sold, non-seasonally adjusted, since 1999 for October is 54,654. This month’s reading at 45,000 was -17.66% lower than your average October. And this year is not your “average” year. From Mr. Awsumb of MacroEdge and US Property Services:

Current single-family homes for sale hit 492k homes. This is 155% of average inventory for sale across all categories, not started, under construction…We have surpassed the number of new homes for sale in all recorded time periods outside of 2007, have more permitted but un-started spec homes for sale than any time period and combined more specs for sale than anytime outside of 2007.

And by the way, one of my favorite topics to discuss with Mr. Awsumb is how cancellations are not tracked. What are cancellations? Remember that the new home sales series tracks initial purchase agreements signed. Anybody can sign one of those sales contracts, and in 2022 we heard from sales teams that they were being told to have everybody and their mother just sign knowing that the folks would not qualify. That’s right, the 45,000 number is BEFORE cancellations. Zelman’s latest survey shows cancellation rates around 15%, so likely sales were below the 40K mark in October.

Although the builders play a critical role in the housing market, they have never been the Kings of said market, taking second fiddle to the existing home market. But, during this cycle they took an outsized role due to the lack of listed single-family, existing inventory.

Source: FRED/Census

The builders also fell hook, line and sinker (again) for the ubiquitous inventory shortage narrative that has plagued us since the COVID housing boom began, and they went a bit wild. And folks, I will say it once again for those that have not heard me beat this drum since 2023 - there is far more new-home inventory out there than is being reported. I can tell you that because I have seen it with my own eyes as I’ve traveled across the country.

Did you know that you don’t need permits in some unincorporated areas? I recently discovered this fact after banging my head against the permit data versus what I was seeing on the road. This makes a lot of sense because a ton of the inventory is being built outside of city centers. How many of these situations exist? I cannot say for sure, but it is at least one plausible explanation for the disconnect between the inventory I’ve seen on the road and published results.

One of my favorite articles to post about the builders is this one from 2010 about the Lennar tax bailout. The industry did a full mea culpa back then with their hands held out, but they have gone and done it once again.

Sales of 40-45K are not going to cut it, and the builders know they are going to be in the hot seat with Mama Wall Street demanding results while rates remain stubbornly high.

Everyone and I mean everyone (except for of course you, Dear Reader) thought those rate drops in the summer were the second coming of the housing market…especially the builders. You can see in the above builder sentiment graph that 2006 and 2024 are following a similar sentiment trajectory. I remember this as well as my builder group at ResCap/GMAC kept telling me they would be fine. They based that on their relationships with builders formed on the golf course. Things are not going to be fine. Once again, we will have to Bubble-in-the-Sun-style demolish these empty suburbs out there.

What drove that sentiment turnaround in 2006 and what does that say for where we are going? Additionally, layoffs and bankruptcies are increasing, so what the heck is going on with employment? We have a special treat today with a deep dive on the labor market from @KennyCap_Phd. Finally, I will provide the monthly summary for October with results by Census region and rankings for all cities in key categories. Something is definitely going on out West that no one else seems to be discussing.

Enter at your own risk….