– by a New Deal Democrat
Let’s start with some reminders about new home sales data:
1. It is very noisy
2. It is heavily redesigned.
3. It usually leads to highs and lows.
With that in mind, unless today’s July new home sales figures are corrected, they are very significant.
First, the June sales figures were indeed revised slightly lower from 590,000 to 585,000. More importantly, the median new home price, initially reported at +7.2% year-over-year, was revised up to + 10.7%.
In July, new home sales fell to 511,000 on a year-over-year basis. That’s the lowest level since January 2016. It’s also down 49.3% from its peak of 1.036 million in August 2020. Here’s the long-term perspective since data began in the 1960s:
That’s just a huge drop. Usually a decline of only 33% from the peak is enough to indicate the impending onset of a recession. The only bigger decline was the housing bust of 2005-07.
Year-over-year figures tell the same story. The only such year-over-year declines that did not signal recessions were in 1966 and 2010:
In the graph above, I’ve also included the much less noisy single-family permits (red). Permits tend to lag by a month or two and are currently only down -11.3%. Again, unless today’s data corrects, permits are likely to decline by more than -20% year-over-year within a few months, which has almost always signaled an impending recession.
Finally, the median price of a new home rose on a monthly basis to $439,400, below April’s peak of $458,200:
But since the price data is not seasonally adjusted, the best way to look at it is on an annual basis. My rule of thumb is that when year-on-year growth is less than half of the peak over the last 12 months, the measure (if we can adjust it seasonally) has probably peaked.
Year-over-year prices in July rose 8.2%, only about 1/3 of the 24.2% year-over-year increase last August:
This tells us that prices most likely peaked in May, the last time the year-over-year increase was more than half of the peak. Even with the upward revision to June, averaging the last 2 or 3 months of price data results in more than 50% below the peak 2 or 3 month price averages of last summer.
In summary: sales continue to fall, prices are likely lower, and inventory can be expected to continue to increase. Moreover, the decline in sales is so severe that, unless it is very heavily revised upward, it almost certainly means that a recession is near.