skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
23 March 2023

New-Home Sales Stabilizing, Starts Need Drop Further

By Michael J. Bazdarich, PhD
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Sales of new, single-family homes were reported today as rising 1.1% in February. However, that slight rise came off a January level that was revised by -5.5% from what was reported a month ago. In other words, the rate of new-home sales announced for February is actually 4.5% lower than the January sales level announced a month ago.

So, we can grouse that today’s news is actually a deterioration from what was reported a month ago. However, we can’t deny that new-home sales look to have stabilized recently after a 33% decline from late-2020 through mid-2022, and recent levels are down only slightly from what we were seeing prior to Covid. The problem now facing homebuilders is that they were woefully late to adjust to the 2020-2022 downtrend in sales and they are facing bulging inventories of unsold new homes.

In the accompanying chart, the scales for new-home sales and single-family starts are adjusted to allow for owner-builds, which show up in housing starts but not in new-home sales. The intention of the chart is that when the blue line lies above the green line, inventories of unsold homes are accumulating, and when the blue line lies below the green line, inventories are depleting.

Exhibit 1: Sales and Starts of New, Single-Family Homes
Sales and Starts of New, Single-Family Homes
Source: U.S. Census Bureau, As of 28 Feb 23. Select the image to expand the view.

By this accounting, starts were “above” sales throughout 2021-22, and only in recent months have inventories ceased accumulating. This is exactly in accord with Census data on inventories of unsold homes. These were reported as declining by a scant 3,000 homes (0.7%) in February and remain at 8.4 months’ sales at recent sales rates. This compares to normal inventory-sales ratios of about 4 months’ sales for new homes.

In order to get new-home inventories back to sustainable levels, builders would have to reduce inventories by some 235,000 units. If sales merely hold at recent, stabilized levels, single-family starts are going to have to decline substantially further for this to occur.

We don’t foresee sales bouncing in the near future. While home prices have declined substantially since mid-2022, mortgage rates remain quite elevated relative to pre-Covid levels, real household income has declined over the past year and employment levels are still some five million jobs below pre-Covid trends.

If new-home sales merely hold recent levels, our guess is that single-family starts would have to drop another 25% to bring inventories into line over the next 18 months. This sounds to us like a reasonable (really conservative) projection for homebuilding. Indeed, it would seem to take a sudden and quick, sharp bounce in new-home sales to forestall such a decline, certainly much sharper than the gains registered for recent months, which are smaller than monthly sampling errors and which, again, are much smaller than the downward revisions to previous months’ sales levels.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.