New Home Sales Decrease Sharply, Record Months of Unsold Inventory Under Construction

New Home Sales Decrease to 511,000 Annual Rate in July

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 511 thousand.

The previous three months were revised down slightly, combined.

Sales of new single‐family houses in July 2022 were at a seasonally adjusted annual rate of 511,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 12.6 percent below the revised June rate of 585,000 and is 29.6 percent below the July 2021 estimate of 726,000.
emphasis added

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

New home sales are now well below pre-pandemic levels, and this is the lowest sales rate since January 2016.

The second graph shows New Home Months of Supply.

The months of supply increased in June to 9.3 months from 8.4 months in May.

The months of supply increased in July to 10.9 months from 9.2 months in June.

This is well above the top of the normal range (about 4 to 6 months of supply is normal).

The seasonally‐adjusted estimate of new houses for sale at the end of July was 464,000. This represents a supply of 10.9 months at the current sales rate

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

The third graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale - at 45 thousand - is up from the record low of 32 thousand in 2021 and early 2022. This is about half the normal level of completed homes for sale but increasing.

The inventory of homes under construction at 312 thousand is very high, and about 8% below the record set in 2006. The inventory of homes not started is at a record 107 thousand.

The fourth graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In July 2022 (red column), 42 thousand new homes were sold (NSA). Last year, 62 thousand homes were sold in July. The all-time high for July was 117 thousand in 2005, and the all-time low for July was 26 thousand in 2010.

The next graph shows new home sales for 2021 and 2022 by month (Seasonally Adjusted Annual Rate). Sales in July 2022 were down 29.6% from July 2021. Year-to-date, new home sales are down 15.7% compared to the same period in 2021.

Over 6 Months of Unsold Inventory Under Construction

The next graph shows the months of supply by stage of construction. “Months of supply” is inventory at each stage, divided by the sales rate.

There are 1.06 months of completed supply (red line). This is about two-thirds of the normal level.

The inventory of new homes under construction is at 7.33 months (blue line) - a new record and well above the normal level. This elevated level of homes under construction is due to supply chain constraints.

And a record 107 thousand homes have not been started - about 2.51 months of supply (grey line) - more than double the normal level. Homebuilders are probably waiting to start some homes until they have a firmer grasp on prices and demand.

New Home Prices

And on prices, from the Census Bureau:

The median sales price of new houses sold in July 2022 was $439,400.  The average sales price was $546,800.

The following graph shows the median and average new home prices. The average price in July 2022 was $546,800 up 18% year-over-year.  The median price was $439,400 up 8% year-over-year.   This suggests a slowdown in price increases, although both the median and the average are impacted by the mix of homes sold.

Note: This reversed most of the sharp decline in prices in June that was probably impacted by the mix of homes sold, possibly related to the sharp increase in mortgage rates.

The last graph shows the percent of new homes sold by price.

There was a shift to lower priced homes in June, but that was reversed somewhat in July. About 7% of new homes sold were under $300K in July 2022, down from 12% in June.  This is down from around 80% in 2002.  In general, the under $300K bracket is going away (inflation has pushed prices higher).   

In July, we saw an increase in sales in the $750K+ range. This increased from 4% of homes in June to 12% of homes in July.

Conclusion

There are a large number of homes under construction (over 7 months of inventory under construction at the July sales rate). This suggests we will see a sharp increase in completed inventory over the next several months - and that will put pressure on new home prices.

Also, during periods of rising cancellations, the Census Bureau tends to overestimate new home sales - so the actual negative impact on the homebuilders is greater than the headline number suggests.