Takeaway: NHS marked a new cycle high in July. The mean reversion upside in both the New and Existing Markets is now rearview.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

NHS | New High Gained, Asymmetry Lost  - Compendium 082316

Today’s Focus: New Home Sales for July 

New Home Sales rose +12.4% MoM in July to +654K, marking the fastest pace of sequential growth in over two years and a new cycle high in total sales.  On a year-over-year basis, NHS growth accelerated to a 42-month high at +31.3% YoY.

Some notable context:  

Comps:  2Q/3Q comp dynamics are favorable so the reported strength in year-over-year growth in New Home Sales hasn’t been particularly surprising.  The same favorable dynamics characterize the next few months as well so reported RoC should remain reasonably solid.

Support Trifecta: In addition to the broadly conducive low-rate environment a couple primary factors have supported relative activity in the New Home market. Until July, New Home Sales activity still carried some mean reversion asymmetry with double-digit upside to the longer-run average and asymmetric upside to average peak levels of activity.  This setup stood in contrast to that in the existing market where activity has already full mean reverted.  Additionally,  the price spread between new and existing homes has begun to compress in recent months as growth in new home inventory has been improving roughly in line with sales and builders have progressively focused more on entry level supply.  We’ll get the EHS sales & price data tomorrow but it should reflect further compression in the median price spread.

Asymmetry Lost:  The negative rejoinder to the point above is that July gain brings NHS back to its LT historical average and collapses the former asymmetry (see 1st chart below).  Housing cycles do tend to be long and autocorrelated – playing out fully in both directions – but the easy, mean reversion upside is now rearview.  The existing-to-new home sales ratio also breached its long-term average to the downside for the first time in the expansion in July as relative strength in the new market over the last  couple quarters has driven a rising share of total transaction volume (2nd chart below).

KISS Principles & Low Vol Narratives:  As we highlighted last month, the simple reality is that, absent a regulatory or geopolitical shock or other outsized externality, labor will remain the primary demand lynchpin and so long as the employment recovery remains intact, we’re likely to see further trudging improvement in new construction sales & starts.  Of course, at the all-time high in equities and with VIX back to sub-12 and complacency in crescendo the ‘long-term recovery/upside’ narrative is always easier to pitch.  

NHS | New High Gained, Asymmetry Lost  - NHS LT cycle context

NHS | New High Gained, Asymmetry Lost  - NHS to EHS price spread

NHS | New High Gained, Asymmetry Lost  - NHS Units   YoY TTM

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NHS | New High Gained, Asymmetry Lost  - NHS by Region

NHS | New High Gained, Asymmetry Lost  - NHS by Price Tier

NHS | New High Gained, Asymmetry Lost  - NHS Mean   Median Price

NHS | New High Gained, Asymmetry Lost  - NHS Inventory

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

Joshua Steiner, CFA

Christian B. Drake