When Will Lower Mortgage Rates Lift The Housing Market?
Today's data on newly constructed single-family home sales was, on balance, weaker than expectations. Consensus expectations were for a reading of 658K new home sales on a seasonally adjusted annualized basis but the actual print showed 646K.
New home sales represent roughly 11% of total housing transaction volume yet is a more important segment of the market as it pertains to new construction, employment, and wages as compared to existing home sales.
The month over month increase of 7.0% was better than the expected 5.1% increase but that is primarily due to a downward revision to the prior three months of data. Last month was revised from -7.8% to -8.2%.
For several weeks, we have raised the idea that despite the lower mortgage rates, the data from the housing market has remained suspiciously soft and more importantly, in a trend of deceleration.
A headline today from CNBC finally agrees with that assessment:
"Sales of new U.S. single-family homes rebounded sharply in June, but sales for the prior three months were revised down, indicating that the housing market continued to tread water despite lower mortgage rates and a strong labor market." - CNBC
Total new single-family home sales increased sequentially yet remain 9.7% below the peak of the cycle from November 2017.
New Single-Family Home Sales:
Source: Bloomberg, EPB Macro Research
The volume of new single-family home sales increased 4.53% compared to the same month last year but the new home sales data series is notoriously volatile. A 12-period average of the year over year growth rate shows a contraction in the volume of new home sales for most of 2019.
In 2017, the rate of new home sales was increasing by roughly 15% year on year. The rate of growth has now fallen below 0% on a smoothed basis, highlighting the trend of decelerating economic activity that has become increasingly pervasive across various sectors of the economy dating back to the last cyclical turning point of January 2018.
New Single-Family Home Sales Year over Year (%):
Source: Bloomberg, EPB Macro Research
The regional breakdown showed large divergences with the Northeast and Midwest suffering while the Southern and Western region drove the monthly increase.
The trend in the volume of new home sales for the Northeastern region is troubling, sitting 50% from the peak of the cycle.
New Single-Family Home Sales: Northeast
Source: Bloomberg, EPB Macro Research
The year over year change in the volume of Northeastern new home sales shows a prolonged period of contraction. It is unclear the root cause of the localized weakness (possible tax changes) but nevertheless, the Northeastern new home sales market is cooling rapidly.
New Single-Family Home Sales: Northeast Year over Year (%)
Source: Bloomberg, EPB Macro Research
The Midwestern region posted a very sharp month over month decline in the volume of new home sales, resting 35% below the peak of the cycle.
New Single-Family Home Sales: Midwest
Source: Bloomberg, EPB Macro Research
On the flip side, the Southern region, the largest new home sales market, increased sequentially in terms of volume and is less than 1% shy of a new cyclical high.
New Single-Family Home Sales: South
Source: Bloomberg, EPB Macro Research
The largest monthly increase, which drove the monthly gain in the total index, came from the West. The volume of new home sales for the Western region is roughly 17% below the cycle peak.
New Single-Family Home Sales: West
Source: Bloomberg, EPB Macro Research
Although increasingly slightly on a sequential basis, the trend in the median sales price of a new home continues to drift lower, printing a reading of ~$310,000.
The median sales price of a new home remains in "correction" territory, down roughly 10% from the cyclical high point.
New Single-Family Home Sales: Median Sales Price
Source: Bloomberg, EPB Macro Research
The year over year change in the median sales price shows the recent weakness in price growth, falling below 0% on a smoothed basis, down from 6% growth in early 2018.
New Single-Family Home Sales: Median Sales Price Year over Year (%)
Source: Bloomberg, EPB Macro Research
Despite lower mortgage rates, the housing market is struggling to gain traction, decelerating on a trending basis across most categories including building permits, and new home sales to name a couple.
Although it may sound repetitive, I will reiterate that the evidence of a recession remains insufficient. The broad-based trend of deceleration in the growth rate of economic activity continues to spread and get increasingly pervasive as this down cycle remains firmly intact.
The playbook remains unchanged. An overweight allocation to defensive sectors and high quality fixed income, sectors that outperform during downcycles while holding an underweight allocation to cyclical sectors remains the most prudent approach to navigating the ongoing cycle risk.
