COVID started in March 2020 and Mortgage rates declined to record lows of 3.00% between Oct 2020—Feb 2021. This brought forward demand and thus lessened demand in later months.
In November 2018 mortgage rates reached 5.00% and NEW home sales materially decreased. In March 2022 mortgage rates materially increased and breached 5.00% and sales immediately declined.
Over the past year, ~50% of the NEW homes sold were homes that were under construction, and <25% were completed homes. This implies there is not a lot of standing inventory available for sale. A key metric to monitor is the red line in the lower right corner. If that rises, it implies excess inventory is occurring.
In the past, when mortgage rates increased, sales of new homes have slowed causing the New Home Sale’s Months of Inventory to spike. Note the mortgage rate spikes in Nov 2018 and April 2022—which exceeded 5.00% this is a major price point for Millennials. The run-up in rates in 2022 is unprecedented.
NEW home Permits, Starts, and Completions reveal how home builders respond to changes in the market. It also gives an indication of the product development pipeline relative to new home sales (see black line).
Recent decreases in Permits and Starts will lead to future decreases in Completions. A key metric to watch is how fast will completions slow relative to sales. With fewer completions, sales will decrease.
When COVID first appeared in the US, new home sales initially dropped and then sharply rebounded as mortgage rates hit multi-generation lows of 3.00%. With a sudden surge in sales, months of inventory dropped (blue line). When mortgage rates rose in early 2021, sales pulled back, and months of inventory returned to levels that prevailed prior to COVID.
It is important to note the large increase in Months of Inventory that occurred in November 2018. That is when Mortgage rates reached 5.00% and sales slumped. On April 14, 2022, rates exceeded 5.00%.
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