While housing starts decreased and the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) showed builder confidence down, sales of new homes rose “unexpectedly” in July, NAHB officials said. Sales rose by 10.6% for the month, to a seasonally adjusted annual rate of 739,000. But those measures fail to mesh with industry data, they warned.
The upward change in new home sales accompanies significant upward revisions for June, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
But, “The Census estimate of new home sales is often volatile and subject to revisions and it is possible that the July estimate for sales will be revised lower next month,” said NAHB chief economist Robert Dietz.
The pace of new home sales in July is up 5.6% from a year earlier. Regionally, on a year-to-date basis, new home sales are up 5.4% in the Northeast, 22.1% in the Midwest and 6.1% in the West. New home sales are down 2.4% in the South.
Improved sales parallel a decrease in mortgage rates and a decline in home prices for June, according to the Home Price Index released by the Federal Housing Finance Agency (FHFA). But NAHB officials warn that Census estimates conflict with industry data, providing mixed signals for those gauging demand for building products.
“While mortgage rates moved lower in July, the Census estimated gains for new home sales do not match recent industry survey data including the NAHB/Wells Fargo Housing Market Index which showed weakness in the current sales index,” Dietz said.
NAHB is forecasting gradual improvements for the home building sector as the Federal Reserve eases monetary policy and mortgage interest rates trend lower. At the same time, the latest inventory measures suggest home building will remain under pressure. With a rise in sales, the inventory of new, single-family home inventory in July ticked lower to a level of 462,000, down 1.1% from the previous month. According to NAHB, this represents a 7.5-month supply at the current building pace. That’s the measure for how many months it would take for that count of home inventory to be sold at the current monthly sales rate. Housing economists advise that a balanced inventory falls between a five- to six-month supply. Inventory larger than a five- to six-month supply suggests weaker or declining home price growth and home building activity. Less than a five- to six-month supply tends to lead to price growth and gains in home building activity, experts suggest.
While sales were up in July, housing starts decreased 6.8% to a seasonally adjusted annual rate of 1.24 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, marking the lowest pace since May 2020.
Despite improved interest rates, affordability also continues to suffer. In the second quarter of 2024, the NAHB/Wells Fargo Cost of Housing Index (CHI) showed a family earning the nation’s median income of $97,800 needed 38% of its income to cover the mortgage payment on a median-priced new home.
“Despite the monthly bump in new home sales data, higher rates continue to sideline buyers as housing affordability challenges remain,” said NAHB chair Carl Harris, a custom home builder from Wichita, Kansas. “The only sustainable way to ease high housing costs is to implement policies that allow builders to construct more attainable, affordable housing.”
Even with an increase in sales, in recent weeks NAHB reported that a lack of affordability and buyer hesitation led to a decline in builder sentiment in August, with the root causes including elevated interest rates, high home prices and higher costs for materials.
Nonetheless, with current inflation data pointing to interest rate cuts from the Federal Reserve and mortgage rates down, buyer interest and builder sentiment should improve in the months ahead, Dietz recently suggested. Others concur.
“It’s becoming clearer that the first rate cut from the Fed is likely to happen in September,” said Richard Branch, chief economist for Dodge Construction Network. “We expect 25 basis point rate cuts every quarter starting in September.”
Rate cuts are expected to “really take hold” toward the end of 2024 and into 2025, Branch said.