Guest Post: New Home Sales Collapse

Note: New homes sales, based on the seasonally adjusted annualized rate metric, are down over 23% from their peak in November 2017. Pending home sales, which translate into existing home sales less canceled contracts (typically failed financing), are down on a year-over-year basis 11 out of the last 12 months. But it’s not just interest rates, which aren’t up much from their lows in the context of the last 20 years. A bigger factor is “market mortgage fatigue.” The Govt has tapped out the pool of potential mortgagees by continuously lowering the bar for qualifying for a FNM/FRE mortgage. In addition, the Government slashed the cost of PMI insurance. That plus the tax cut have offset the cost effect of slightly higher mortgage rates (up about 1% in the last year – big deal). The remaining pool of first time buyers largely will have trouble qualifying until the Government lowers the bar again…

Aaron Layman, who is one of the few honest realtors, wrote a worthwhile commentary, posted below, on the state of the housing market. You can visit Aarons’s site here: AaronLayman.com

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The Census Bureau numbers for October new home sales posted at a seasonally adjusted annual rate (SAAR) of 544,000 units. This was way below expectations of a 575,000 print, and near a three-year low. As I have been detailing for much of the year, much of that “pent-up demand” that you hear real estate industry mouthpieces talking about is a giant work of fiction, a tired marketing ploy that the media, economists and Realtors have been using in attempt to justify grossly inflated home prices across the U.S.

Well, it appears the cat is officially out of the bag with the release of October home sales. While the previous months sales were revised higher, the miserable October print just corroborates my thesis that the Fed’s asset-bubble unwind is just getting started. There are plenty of other consequences in the pipeline. It’s important to remember that the housing market, thanks to the Federal Reserve’s failed policies, is more intricately tied to the financial markets than ever before. This was the Faustian bargain that Obama and the Fed made when they decided to bail out every Wall Street institution under the sun at the expense of American taxpayers, including the ones running obvious accounting control frauds. Of course the millions of homeowners who lost their homes to foreclosures (many of those executed in kangaroo courts with fraudulent robosigned documents) were deemed acceptable collateral damage to save the “system”.

The ultimate con was of course advertised as a salvation of the economy. In reality it just delayed the eventual reset with a new pile of debt that is larger than ever and spread among multiple asset classes rather than just housing. The big problem, one that the Fed’s economists remain willfully ignorant of, is the unfortunate reality that all of this speculative debt is more interest-rate sensitive than they would have you believe. The new home sales market is exposing this unfortunate dilemma very clearly.

According to Census numbers, new home sales in October collapsed 12 percent from the same time last year. Sales were down 8.9 percent from the revised September print. The median price of a new home contracted in October was 309,700, down $9800 or 3 percent. The average price of a new home contracted in October came in at $395,000, up $1,000 from October of last year. The supply of new homes for sale in October rose to 7.4 months, a 32 percent jump from October of last year! So if prices fell three percent and supply jumped higher, why the big collapse in sales? Can you spell “housing market bubble”. Aside from the swoon in the stock market during October, the other key ingredient for deflating an asset bubble was also present, as interest rates hit a multi-year high. We now have a good idea of what the breaking point for the housing market is, and it’s a lower threshold than many in the media were/are willing to admit. This is the result of years of rampant artificial asset price inflation courtesy of the Federal Reserve.

The swoon in new home sales is simply the reflection of moral hazard coming home to roost. While the media, the Fed and its army of economists have continued to tout the amazing bull market “recovery”, the sand (debt) upon which it was built is now shifting. That carefully crafted narrative that we have been spoon-fed for the last several years is looking more tenuous by the day.

4 thoughts on “Guest Post: New Home Sales Collapse

  1. As I mentioned to you Dave, I fully expect the October print on new home sales to be revised higher (Census volatility), but it won’t change the declining trend. There’s simply too much debt in the system, and real incomes have not kept pace with real inflation. There are some who thought 6% mortgage rates would be the inflection point at which we would see real pain in the housing market. Turns out the inflection point is closer to 5%.
    All of this new debt is more interest-rate sensitive than the Fed assumed because in the real world (a space the Fed’s economists rarely visit) things are a bit more challenging than the media would have us believe. But that’s the nature of the Fed’s game, to encourage the speculation and continuous credit growth, consequences be damned.

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