– by a New Deal Democrat
Hope you’re recovering from a turkey coma today. Here’s a little belated commentary on Wednesday’s new home sales report.
New home sales are noisy and highly reviewed, so I prefer housing permits and especially single family permits as a source of information.
But. . . on the other hand, new home sales are usually the first housing indicator to reverse. In fact, during extensions they often peak so early that they are more of a mid-cycle indicator than a long leading indicator. Here’s a comparison of new home sales with single-family permits from the 1970s through the Great Recession:
Sometimes the two series peak and fall at the same time, but less often (1977, 1985, 1998, 2005) new home sales peak a few months before permits.
Why is this noteworthy? Here is the current extension:
Per my comment above, new home sales peaked first. But also look at the far right side of the graph. New home sales bottomed out in July and are currently at their level since last spring, while permits are still heading south.
Watch for revisions, but new home sales may signal a bottom in the housing market, which may be correct if long-term interest rates are in the process of peaking now, even as the Fed continues to raise short-term rates.
Average new home prices are not seasonally adjusted, so the only good way to look at them is on an annual basis. Remembering as always that sales lead prices, here’s the year-over-year change in each:
Again, very noisy, but the overall year-over-year trend in prices is down. Average 3-month growth over the past year has fallen from over 22% to under 12%, suggesting that new house prices are on the verge of falling in absolute terms.
On a more general note, notice that after making a recession warning, I’m now on the lookout for indicators that will tell me how long and deep the recession might be and when it might bottom out. Watching for a spike in long-term interest rates is an important part of this process.