LIVE MARKETS-New home sales skyrocket, defying sagging housing sector

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NEW HOME SALES SKYROCKET, DEFYING SAGGING HOUSING SECTOR

The labor market is softening, borrowing costs remain elevated, homebuilder sentiment is at multi-year lows, building permits are dropping, and new home sales just skyrocketed to a three-and-a-half year high.

Say what?

The sales of freshly constructed single-family U.S. homes USHNS=ECI unexpectedly surged by 20.5% in August to 800,000 units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department.

That's the highest level since January 2022, and represents a whale of an upside surprise, landing 23.1% north of the 650,000 units SAAR analysts predicted.

The number handily reverses the downwardly revised 1.8% drop in July.

Regionally, a 74.2% surge in new home sales in the Northeast and a 24.7% jump in the South provided the muscle, although gains were also seen in the Midwest and West.

As a result, inventory dipped.

At August's rate of new home sales, it would take 7.4 months to sell every unit on the market, down from 9.0 months in July.

The Commerce Department's report amounts to a glaring exception to a growing stack of evidence (weakening building permits, sour homebuilder sentiment, etc), that the new build segment of the housing market faces challenges, as affordability is strained by tariff-related materials costs, still-elevated borrowing rates and lingering economic uncertainties.

Writing that the unforeseen 20.5% bump "defies credulity," Oliver Allen, senior U.S. economist at Pantheon Macroeconomics writes "the three-month average of new sales had been grinding lower this year, echoing the slide in the current sales index in the NAHB homebuilders’ confidence survey."

"The labor market continues to weaken, reducing the ranks of potential homebuyers," Allen adds.

On Thursday, a report from National Association of Realtors is expected to show sales of pre-owned homes, which account for the lion's share of total U.S. home sales, to have dipped 1.2% in August.

Separately, the cost of financing home loans drifted a wee bit lower last week, which inspired a proportionately wee increase in borrower applications, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate USMG=ECI shed 5 basis points to land at 6.34%, the lowest it's been in nearly a year.

That prompted a 0.3% uptick applications for loans to purchase homes USMGPI=ECI, while refi demand USMGR=ECI, which accounted for 60.2% of total mortgage activity, edged 0.8% higher.

Combined, total mortgage demand rose by 0.6%.

"Interest rates generally have moved up following the FOMC meeting last week but remain in a range that should continue to lead to increased refinance activity," says Mike Fratantoni, chief economist at MBA. "Refinance volume increased further last week and is now 80 percent higher than four weeks ago."

Over the last twelve months, the 30-year fixed rate jumped nearly a full percentage point above where it was the same week last year - hitting its apex at 7.09% in mid-July - it's now 21 basis points above where it sat a year ago.

Over that same time frame, refi demand has grown by 42.1%, while purchase demand - considered among the more forward-looking housing market indicators - has increased by 17.7%.

While purchase applications are relatively forward-looking, all economic indicators are viewed in the rear view mirror.

The stock market, on the other hand, reflects where investors expect a sector to be six months to a year down the road.

With that in mind, investors see cracks in the housing market's foundation. The S&P 1500 Homebuilding index .SPCOMHOME and the Philadelphia SE Housing index .HGX - have woefully underperformed the broader market.

The SPCOMHOME and HGX indexes are currently down 16.0% and 10.8%, respectively, over the last year, while the benchmark S&P 500 .SPX has advanced 16.1% during that time.

(Stephen Culp)

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