When is a double digit jump in sales, YoY, a bad thing?
New home sales jumped over 16% versus an expected increase of 1.9%. This is stunning news.
Yet it is not all rosy for home builders. Housing starts were down 15% from a year ago. This is cause for concern.
Obviously, the last few months saw the finishing of homes that were under contract. Builders typically require 90-120 days to complete a home once it is started. With COVID-19 hitting in March, this would still put these sales in the window of what was contract.
The drop in new home starts tells the story that people are not rushing out to buy new homes. This comes on top of news that existing home sales dropped like a rock.
Housing is a vital part of the economy. The reach is huge meaning that a slowdown ends up taking many industries down with it. Not only do we have construction but also finance, furniture, and an assortment of services that are all tied to home sales.
The default rate on mortgages is now over 10% with many homeowners taking advantage of the forebearance program. Not all of these will end up foreclosed upon because many were taking a strategic approach. That said, there are still a lot who made the move in desperation.
If the situation from a decade ago is any indication, we can expect the majority of these mortgages to end up in foreclosure. The re-default rate tends to be very high.
We see the situation made worse by the fact that banks are hesitant to lend. They are raising lending standards which is common when the economic situation turns uncertain. Banks suddenly get risk-averse.
Demand will likely remain strong as there is still a housing shortage. This stems from a labor shortage along with rising material costs including lumber. Single family homes are running behind.
That said, rising unemployment and economic uncertainty could put a damper on demand. We are also likely to see a shift away from crowded cities to lands further out because of the work from home movement.
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