The latest “New Residential Sales” report has aligned with other negative indicators in the housing market, including a decline in home builder survey results, decreasing median sales prices, and low lumber prices. Despite this, home builder stock prices have reached new all-time highs, raising questions about possible excess investor optimism. The fundamentals of the market remain unimpressive, with new house sales showing a stronger performance in the first six months compared to the next six months due to seasonality.
Home builder inventories have also raised concerns, with builders currently holding about nine months’ supply of new houses for sale, well above the typical six-month average. This surplus inventory is likely to lead to a reduction in construction activity to address both the seasonal decline in sales and the oversupply of homes in the market. New house sales prices have stagnated after experiencing a 30% increase, with inflation-adjusted prices actually declining, further indicating a weakening market.
Additionally, lumber prices have fallen back to their 2020 lows, underscoring the lack of demand in the home building sector. The overall impact of the weakening home building market extends beyond just the housing industry, as new construction activity has a broader economic impact and reflects the state of potential home buyers. There are growing concerns about the potential for a recession as rising prices, despite Federal Reserve assurances of controlled inflation, continue to strain savings, income, and household budgets.
While there have been discussions about the Federal Reserve lowering interest rates, there is skepticism about whether this would result in reduced mortgage rates. The risk of a recession due to the weakening home building market and its ripple effects on other industries remains a significant concern. The current state of the market highlights the importance of closely monitoring home building activity as an economic indicator and being mindful of the potential implications for future economic conditions.
