June New Home Sales: Rapid Reaction

• June new home sales fell 5.3 percent from May, to 631,000 (SAAR), but were up 2.4 percent from a year ago. Initially reported figures from the prior three months were revised downward by a combined 27,000 sales.
• The median (non-seasonally adjusted) price of new homes sold in June was $302,100, down 4 percent from a year ago to its lowest level since February 2017. The dip may initially be welcome news to many buyers, but it's important to remember it represents a national median, and was largely driven down by a big dropoff in sales in the pricey West.
• Inventory was up slightly from May, to 301,000 homes for sale, though downward revisions to past months' data mean inventory is not breaking meaningfully past the 300,000 mark.

Today’s larger-than-expected monthly dip in new home sales does not diminish a steady string of year-over-year gains, although those year-over-year gains have steadily slowed over the first half of this year. With existing home inventory so tight for so long, and prices rising so quickly, home builders clearly are responding to a market starved for new supply and buoyed by a strong labor market. And despite rising costs, builders are succeeding at delivering more homes. But it remains to be seen how long they can continue what is becoming a very complicated dance as costs march upward and rising mortgage rates gradually eat into home buyers' affordability. Today’s new home sales represent the optimism of builders over the past year, when these deliveries were in the early stages of conception – yesterday’s permits and starts are today’s sales. But permits – a more forward-looking signal of the construction market – have sputtered during the first half of 2018, and it’s an open question whether this reflects increased builder pessimism going forward in the face of increasingly stiff cost headwinds. The prices of land, labor and lumber continue to spike, and while builders have largely proven able so far to deliver homes at prices that are accessible to many buyers, buyers will ultimately bear the brunt of those rising builder costs. As strong as new home sales have been over the past year, it’s not obvious that momentum will be able to resist the powerful gravitational pull of costs over the next 12 months.