Executive Summary
In May '24, new home sales were about 14.3% of the total houses sold in the United States. Compared to a month ago, new home sales showed negative growth in the Northeast, the South, the Midwest, and the West. Year-over-year, new home sales in the Midwest grew 13.3% while the rest of the regions were in double-digit declines. Since there is no clear trend for new home sales and interest rates are 5.50%, we do not feel the need to buy any homebuilder stocks or ETFs.
You Should Care About This Leading Economic Indicator!
New home sales are one of the major economic indicators of the health of the housing market, and they help investors gauge how the economy is doing. The demand for housing shows consumers' confidence in their future employment conditions through their willingness to make significant long-term purchases. The sale of new houses boosts economic activity as workers need to be hired; also, raw and other essential materials such as lumber, floor tiles, roofing materials, and electrical wiring, to name just a few, must be manufactured, transported, and warehoused before finally being used at the actual construction site. This report aims to analyze the attractiveness of the equity market ― stocks and ETFs ― for potential short- to mid-term equity positions.
Key Points
In May '24, new home sales came in 3% below the 636K consensus estimate. The 619K new homes sold represent a MoM and YoY decrease of 11.3% and 16.8%, respectively. New home sales haven't been this low (619K) since Nov '23 at 611K.
59.5% of New Home Demand Comes From the South
In May, the median and average sale prices for new homes in the US were $417,400 and $520,000, respectively. Moreover, sellers listed 481K new homes for sale in May, representing 9.3 months of supply. The monthly supply of new home sales in the US is higher than usual, above the six-month benchmark; it peaked in July '22 at 10.6 and bottomed in May '23 at 6.9 monthly supply. The south was the most vital region, representing 59.5% of the total new home sales in May.
Impact by Region
In May, the Northeast saw a 43.8% decline in new home sales, and it declined the same percentage year-over-year; moreover, MoM, the Midwest, the South, and the West fell 8.6%, 12%, and 4.5%, respectively. YoY. The Midwest had the best YoY growth, up 13.3%, while the rest of the regions fell in the lower double digits.
Correlation Between US New Home Sales and the Monthly Supply
History tells us that the monthly supply and sales of new homes in the United States are negatively correlated. If the monthly supply rises continuously, new home sales will likely move in the opposite direction. Since the 1980s, monthly supply and new home sales have usually signaled recessions as the supply tends to spike and the demand tends to drop before entering one. The last time it happened was in the first quarter of 2020. However, there are some exceptions; for instance, in the first quarter of 2022, the monthly supply of new homes spiked, and sales of new homes dropped significantly, but no recession took place. The same occurred during the second quarter of 2010. Therefore, investors should not have to worry about it for now.
The Recession that Never Happened
The first half of 2022 pointed to a possible recession ahead, as new home sales dropped sharply, just as they had during the previous seven recessions. However, no recession occurred thanks to a resilient job market; the US unemployment rate averaged 3.7% during that period. In addition, new homes for sale tend to decline during recessions as homebuilders become less optimistic about the future; therefore, if new houses sold and new houses for sale drop in tandem, a recession is very likely, otherwise recession probabilities diminish considerably.
Investment Analysis → Neutral(Hold)
New home sales for May were weaker than expected, representing a slowdown in demand in the housing market. Such a soft demand means the economy is cooling down amidst the current interest rate set by the Federal Reserve — above 5%. News that the monthly supply of new homes continues to trend up is a negative for the overall health of the housing market, for it shows that consumers are not going out there and buying those houses in supply. A 9.3 monthly supply of new homes in the United States means more people are selling new houses than buyers are looking for. Such a high supply gives power to buyers.
However, there will be less future economic activity as a result of fewer houses getting built and buyers taking their time to buy new homes; such buyer behavior leads to a chain of events ― there will be fewer workers needed to be hired in terms of labor; commodities and raw materials wise, there will be a lower demand for lumber, floor tiles, roofing materials, and electrical wiring, to name just a few things, that must be manufactured, transported, and warehoused before finally being used at the actual construction site. In addition, there is no sign of recession based on this data since sales have been trendless for the past six months. In the meantime, keep an eye on Home Depot.
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