Sales of new homes increased last month Census reportbut homebuilders now face a supply problem: their inventory is growing. This is why housing starts are currently at recession levels.
Monthly sales of new homes have stagnated over the past two years. When mortgage rates fall, sales improve, but things become more challenging for builders and buyers when rates rise. Home construction starts and permits are currently in a downturn, while the number of completed homes from homebuilders is increasing. This situation poses a risk to the construction workforce in 2025. I wrote about why this poses a risk of a housing recession to the Federal Reserve.
As mortgage rates continue to rise along with supply, this does not bode well for meaningful housing market growth. Is 2025 the first year we will lose housing construction jobs? Earlier this year the mortgage interest rate was 7.50%; during that period we received one negative monthly labor report in the residential construction industry. Mortgage interest rates recently fell back to 6%, but have now risen above 7%.
This problem extends beyond just housing. With private wage growth slowing and mortgage rates rising, pressure on the Federal Reserve and the unemployment rate increases for the coming year, especially if we see job losses among home builders. Historical trends in economic cycles are clear: When housing permits and housing starts to decline together, residential workers often lose their jobs at some point in the future, usually before the economy enters a recession.
As the chart below shows, the Fed has repeatedly missed this red flag in previous cycles.
Let’s dive into today’s report and find out where we are in the cycle. It’s always good to see how the pieces fit together and what insights we can get from the latest data.
From census: Sales of new houses: Sales of new single-family homes reached a seasonally adjusted 664,000 in November 2024, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.9 percent (±18.6 percent)* above the revised figure of 627,000 in October and 8.7 percent (±19.3 percent)* above the estimate of 611,000 in November 2023
The graphs below provide insight into the current state of affairs on the market for the sale of new homes. New home sales appear somewhat range-bound, even as inventory increases and homebuilders experience a decline in pricing power, especially in the South.
Builders have managed the situation by offering lower mortgage rates, but this strategy could become costly as their profit margins come under pressure. It doesn’t help that mortgage rates have been rising lately. Unlike the existing home sales market, which is operating from record lows, the new home sales sector has never seen such a massive decline, so the bar is higher here.
We currently have 120,000 completed units available for the homebuilders to sell. While this number may not seem substantial, it leads builders to be more cautious when issuing new permits. Additionally, builders still have a significant number of homes that they have not yet started on, so they need more clarity on mortgage rates before deciding to issue additional building permits for single-family homes.
Although new home sales showed an increase in this latest report, there are signs of trouble ahead, especially if mortgage rates continue to rise. Over the past two years, new home sales have significantly outperformed the existing home market. Even the newest MBA purchase application data shows year-over-year growth for new homes. However, the focus here is on supply and margin pressure.
Why is this important? Because homebuilders aren’t the March of Dimes, they keep an eye on their gross margins and future sales. It makes sense why home construction starts and permits are at recession levels: builders were right not to issue more permits for single-family homes and condos because if they did, there would be more pressure on gross profit margins doing.
