New home sales totaled 49,000 units in February, according to an estimate released today by the Census Bureau. That number is the actual number of sales during the month as estimated by the Bureau. It was not seasonally adjusted (NSA). It was derived from housing starts and permits data, along with a tiny sample survey of US home builders. That estimate will be revised on each monthly release over the next 4 months. Those revisions can be quite large.
The 49,000 sales were 4,000 units, or 8.9%, greater than a year ago. The 8.9% increase shows the growth rate accelerating. It was at zero just 2 months before. That was the lowest growth rate of the past 12 months. The high was a 25.7% year over year gain in September. That was not an outlier. The Y/Y gain in July was 25.6%. The market was blowing off in the third quarter thanks to all time record low mortgage rates of 3.4%. That compares with 4.2% today.
February sales were 8,000 higher than January or a difference of 19.5%. That compares with a gain of 15.4% in February 2016, with that month having an extra day thanks to leap year. The average February gain from 2006 to 2016 was 4,300 units or 13%. This February’s increase was greater than 8 of the 10 preceding Februaries. However, we have to take this month’s number with a grain of salt, since it is subject to a large revision next month and a smaller one in ensuing months. It may not have been as “good” as it currently looks.
The current data suggests that a buying panic is on. Buyers are panicking because of rapidly inflating new home sale prices. They are panicking in particular because of the fear that mortgage rates will resume moving higher. Higher prices and higher mortgage rates causes monthly payments to inflate. That reduces affordability and sucks potential sales from future months. That will eventually leave a demand vacuum.
It is not possible to accurately predict with certainty when a buying panic will be exhausted, but these panics are typical of the end stage of a boom or bubble. Once demand is exhausted, the market collapses.
The headline numbers reported in the media showed sales at a seasonally adjusted (SA) annual rate of 592,000. As the government press release put it, “This is 6.1 percent (±17.3 percent)* above the revised January rate of 558,000 and is 12.8 percent (±18.0 percent)* above the February 2016 estimate of 525,000.
Here’s how the NAR’s PR people at the Wall Street Journal put it:
Jump in U.S. New Home Sales Defies Expectations
New residential sales rose 6.1% from the prior month
U.S. new home sales increased sharply for the second consecutive month in February, an indication that growing demand and a pickup in construction activity could help propel a strong spring selling season for this segment of the market.
Note that both the Wall Street Journal, Realtor.com, and News America Marketing (“Your marketing is our business”) are all co-subsidiaries of Rupert Murdoch’s News Corp. The Wall Street Journal is not a source of unbiased news reporting and analysis. It is a part of a PR machine.
SA data purports to represent a smoothed version of the trend without the usual seasonal variation. Sometimes it comes close to the mark. Sometimes it doesn’t. We usually can’t tell from SA data whether the trend is changing until several months after the fact.
Furthermore, the statistical margin of error in the new home sales data is larger than the reported monthly change. The 12.8% reported annual gain is likely to get revised partly away.
Instead of the problematic SA data, we put our focus on the actual NSA data, and plot it on a chart. That way we can see the actual trend with our very own eyes, rather than having having the government and the media tell us what the trend supposedly might look like. Or might not.
The actual data suggests that we are in the midst of a second smaller market blowoff than the one we had in Q3 last year. As prices continue to rise, and mortgage rates threaten to resume their rise, potential buyers are pushed into taking action before they otherwise would. This depletes the pool of potential demand. Likewise as prices and mortgage rates rise it drives the monthly payment higher. Fewer buyers qualify.
So while prices are higher and sales have increased, those momentum of increases has slowed dramatically. They come at a huge cost– weakening of the demand pool and a demand vacuum in the future.
In a parallel process, banks loosen their underwriting standards in the panic to get loans closed, earn the fees, then get the loans sold to someone else who will be the bagholder when the market goes belly up. Often the bagholder is you and me, in the form of government owned Fannie and Freddie. When the losses start rolling in, we must pay to fund covering the losses via higher taxes.
The chart below shows the trends of new home sale prices, mortgage rates, and sales volume. Mortgage rates are on an inverse scale to show the correlation with the direction of prices and sales volume.
Sales volume, while rising, remains at historically depressed levels. Volume has continued to rise, but at a slower pace, in spite of the rise in mortgage rates from last summer. Obviously, that can’t continue if rates continue to rise.
The chart also shows a sharp year to year decline in February sale prices. This is where the mortgage qualifying problem is beginning to show up. Prices are at all time nosebleed levels. If builders want to maintain sales volume, they must cut prices. If mortgage rates rise from here, one of two things must happen. Either builders must continue to cut prices sharply to prevent a collapse in sales. Or if they don’t cut prices, sales will collapse.
Even if rates decline, sales are likely to struggle because so much demand has been pulled forward, leaving a shriveled pool of qualified buyers. The current drop in prices could be the beginning of the end.
I’ll post more charts and data on just how dangerous the current situation is in tomorrow’s report.
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