New home sales battle: mortgage rates vs. lumber supply

Today the Census office reported that in March 2021, new home sales were at a seasonally adjusted annual rate of 1,021,000. That number is beating estimates.

In addition, significant positive revisions were made to the turnover of the previous months. I expect this month’s headline to be revised a little lower next month, but even given that this report was the best new home sales report in over a decade. The overall figure was solid, the revisions were all positive, and the monthly supply on a three-month average is less than 4.3 months.

New home sales are much more affected than existing home sales by fluctuations in mortgage rates. Mortgage rates of 4.75% to 5% created a spike in supply in 2018. At that time, we worked from the weaker recovery in new home sales and housing starts, and sales n were not high, historically speaking. My prediction for the bond market was that it would drop in 2019, and if global growth slows, the 10-year yield will drop below 2%. This would result in mortgage rates well below the 5% levels of 2018.

As you can see below, today’s monthly supply is very different from what it was at the start of 2020. Demand is better now than at any time from 2008 to 2019. During this period we have never had a monthly supply less than 4.3 months with increasing sales.

The most critical housing data line to follow in this housing market is the monthly supply trend for the new home sales market. When the monthly supply is 4.3 months, and below, builders’ confidence is high. When the supply is between 4.4 to 6.4 months, the builder’s confidence is fair for new construction. As long as new home sales can increase, construction can take place.

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