The economic data have been almost uniformly downbeat the last few weeks, so the news of gains in new-home sales was welcome relief. Within homebuilding itself, single-family housing starts have dropped substantially through the last three months, and new-home sales themselves had initially registered an April decline of 11.4%—now revised to a 7.9% decline. To repeat, it was nice to see a less dire number for a change.
Still, today's data do not change the outlook for homebuilding from the mediocre stance we asserted a week ago. Then, in response to the sharp May decline in housing starts, we stated that the uptrend in building activity that had begun last fall was clearly broken and that homebuilding would hold flat, at best, through the rest of the year. Nothing in today's news signals otherwise.
While new-home sales rose in May and while there appears now to be a slight uptrend in sales, the level of new-home sales is still not sufficient to sustain the current level of housing starts, let alone amount to any increases. The relative scaling of the chart below shows new-home sales levels lagging below those of starts, even with the recent declines in starts and the recent gains in sales. Affirming this take is the fact that inventories of unsold new homes have risen steadily for the last 10 months, a clear indication that homebuilding has gotten ahead of home selling.
With new-home inventories now 5.3 times monthly sales, there is not enough inventory overhang to make builders pull back sharply, but there is enough that builders will be reluctant to further increase starts levels until new-home sales levels have risen sharply above recent rates. We think this latter outcome is unlikely, and, again, we expect homebuilding to hold steady through the rest of the year. Today's news diminishes the downside risks for homebuilding, but it is not enough to establish any serious upside risks. So, don’t expected any boost to US economic growth in late-2017 from homebuilding.