July new home sales surged 13.9%

Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down new home sales for July with Brad Dillman, Cortland Chief Economist.

Video Transcript

BRIAN SOZZI: OK, new home sales in July jumped 13.9% to an annual rate of 901,000. This is over 36% higher than the new home sales data from July 2019. Joining us now to discuss is Brad Dillman, Cortland chief economist.

Brad, how do you-- how can you distill what we're seeing in the housing market right now? It's not just this data we got out today. It's just a string of data that says the housing market is in really, really good shape.

BRAD DILLMAN: Yeah, this was a huge print, well above expectations of 775,000 on a seasonally adjusted annualized basis, which would have been basically have been about the same as the prior month. And yeah, to your point, we saw some great figures in both starts and permits, and then also in existing home sales as well, which are now back up to a level a little bit above their pre-COVID February level. So how we make sense of this, I see two reasons why-- actually, I'll give you a three.

One, we all know low mortgage rates have definitely been helping the housing market. Second is the old pent-up demand argument. A lot of people don't appreciate this, but if we think about where this print came in today, this would have been a pretty good looking new home sales print during the dot.com recession. So after 10 years of very subdued housing activity by every metric except for home prices, really, we're finally seeing new home sales and new supply really starting to come to the market.

But I think we're also beginning to look at little bit of a headwind on the supplies-- on the construction materials cost side. So overall right now, there is definitely this big move into single-family housing. But I also think that with what's happening on the cost side, we may see a little bit of pressure in the months ahead.

ALEXIS CHRISTOFOROUS: Talk to me more about where we're going to see that pressure from. We know that inventories are already pretty low. Are you seeing that the cost for these raw materials to build the homes is going to go up?

BRAD DILLMAN: Precisely, at several parts on this as well. So the average hourly earnings in construction have been ticking up. That is the rate that's been expanding since April. It's now at its highest level in a little over a year.

We had seen a lot of deflation in construction materials costs last year. So that's-- if we're to look at construction material cost gauges in year-over-year terms, they were contracting for a good chunk of 2019. And that's been wind in the sails for the housing market up to this point as well. But the most recent print on those gauges has showed year-over-year increases in July. So we're now kind of back into an inflationary environment as it relates to construction materials costs.

And this is also supported by a variety of anecdotal evidence coming out of general contractors, suppliers, and even lumber companies that have to do with an increase in lead times in various materials. So first of all, we've all seen what's happened in lumber prices, which have gone up significantly. But now we've got an increase in lead times in things like windows and doors and all these other pressures that we would see on the cost side that I think will begin to weigh in subsequent prints in housing. That's not to say that we're going to see a material decline, but just to say that this cost creep is definitely going to be felt, if not in the months ahead, the quarters ahead.

BRIAN SOZZI: In the data you study, Brad, any indication that consumers, the ones that are out there buying these homes, are taking on too much home?

BRAD DILLMAN: Nothing that I've seen. There has been some metric showing that lending standards have been tightened. And if you look at confidence levels-- obviously, homebuilders are always confident. And as I always say, the only time to worry about builders is if they're not complaining about anything. And we're hearing some healthy complaints on the cost side, right?

But if you look at optimism for buyers, it's actually not particularly attractive right now. And I think what we're seeing there is the folks who are buying are probably more qualified than we would have been seeing say in the last cycle. Obviously, that's kind of a poor comparison, but certainly a little bit better. These are folks who are almost certainly in white collar job sectors where they haven't been as affected by the COVID crisis as folks in say leisure and hospitality, who are working on hourly-wage-based jobs, and who, frankly, are not in the market to be a home buyer at this stage.

ALEXIS CHRISTOFOROUS: Brad, where is it breaking down in terms of geography? Where are people looking more to buy homes? Where are companies looking more to build those homes?

BRAD DILLMAN: So in the most recent new home sales print that just came out, all regions increased except for the Northeast. It actually saw a decline. We do know that folks continue to migrate to the Sunbelt and to less populated parts of the country as they seek what really is affordability.

And I want to highlight that this is not anything new. While there's been a lot of anecdotal evidence related to COVID, we did, in fact, see a lot more migration to the Sunbelt and many metro-- and more affordable metropolitan areas in the kind of middle parts of the country five years ago. So the rates are still going, but they've slowed down. And so I think we're kind of seeing the tail end of that, where perhaps folks who have moved are finally getting into a position to buy and are able to take advantage of these low rates.

Builders themselves, of course, continue to target these areas that have relatively friendly zoning laws that allow them to build and relatively cheap land prices. And again, that's part of the reason folks are migrating to these geographies in question, because they can achieve the American Dream in the Sunbelt.