New Homes Sales Fell 16.6%, and Were Down 19.8% in the South and 13.8% in the West

Mark Hake

In a major signal that the US economy could be headed to a major recession, the Housing and Urban Development (HUD) agency reported on May 24 that new single-family sales fell 16.6% in April on a seasonally adjusted annual rate.

The number of new home sales dropped to 591,000 in April (±10.4 percent), down 16.6% below the revised March rate of 709,000.

Details of the HUD Report

The greatest decline in new privately-owned homes sold and for sale was in the South, which fell 19.8% from March, followed by -15.1% in the Mid-west, and then -13.8% in the West. New home sales fell just 5.9% in the Northeast.

The National Association of Home Builders (NAHB) officials said the lower single-family starts shows a decline in confidence in the sector. They said this is the result of increasing mortgage rates and ongoing supply chain and building materials cost issues.

The median sales price is now $450,000. Many potential home buyers are being priced out of the market. That is what Jerry Konter said, the chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Savannah, Ga.

A year ago, 25% of new home sales were priced below $300,000, while in April this share fell to just 10%.

Recession Warning and the Stock Market

“The April drop for new home sales is a clear recession warning,” said NAHB Chief Economist Robert Dietz. “The median price of a newly-built single-family home increased 19.7% year-over-year."

This could have a huge follow-on effect on both the stock market as well. That is despite the fact that homebuilding stocks are how very cheap on a forward price-to-earnings (P/E) basis.

For example, Taylor Morrison Home Corp (TMHC) trades on a forward P/E of just 3 times, as does Meritage Homes (MTH) and KB Home (KBH).

These stocks are cheap as investors think that earnings will fall in the future. This implies that their P/E multiples will expand without the stock prices rising.

If the NAHB Chief Economist is right, this recession warning could be a major event, especially if the new home starts keep falling. It could be a sign that employment and inflation, happening at the same time will cause stagnation in the US economy. Tightening monetary policy is putting upward pressure on mortgage rates while supply chain disruptions are pushing up construction costs.

Investors in both the real estate and stock markets should take caution. We may not have yet seen the bottoms in both sectors.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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