Why new-home sales are disappointing, despite beating estimates

Today’s new home sales report beat market expectations, just like last week’s existing home sales report. However, a detailed analysis of the data explains why housing permits continue to remain at recession-level figures. Builders are struggling to get clarity on how many homes they can sell in this rate environment in the future. Without more clarity on mortgage rates, substantial growth in housing permits is unlikely.

From Census: New Home Sales: Sales of new single-family houses in December 2024 were at a seasonally adjusted annual rate of 698,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.6 percent (±19.7 percent)* above the revised November rate of 674,000 and is 6.7 percent (±16.2 percent)* above the December 2023 estimate of 654,000.

The charts below provide an overview of the key data lines we observed today. My initial impression is that sales are not plummeting as they did in 2022, but are also not experiencing significant growth. We are maintaining a steady level, with the best results appearing when mortgage rates approach 6%. Beneath the headline sales figures, there are underlying trends that merit attention. Also, the sales for the last three months were revised negatively.

For sale Inventory and months’ supply: The seasonally-adjusted estimate of new houses for sale at the end of December was 494,000. This represents a supply of 8.5 months at the current sales rate.

This month, the monthly supply data decreased, but the key point is that there are currently 118,000 completed units available for sale from builders. Additionally, there are 268,000 homes currently under construction. Furthermore, there remains a record high of 108,000 homes that builders have not yet started constructing, all while mortgage rates remain above 7%.

Unsurprisingly, the builder’s confidence index, which looks ahead six months, has experienced its largest month-to-month decline in some time. None of this bodes well for housing permits to grow meaningfully. 

If you’re wondering why construction labor might be at risk in 2025, supply is piling up and mortgage rates are still above 7%. Not all builders have significant profit margins to buy down mortgage rates to sell their homes, so it’s a prudent business decision for them to remain cautious.

Today’s home sales report was disappointing if you’re looking for clarity on when we’ll see housing permits grow again. Although the headline figures beat expectations, there were negative revisions and increased inventory. Additionally, builder confidence has declined as mortgage rates have stayed above 7%. 

Could things improve? A decline in mortgage rates just toward 6% would make it much easier for homebuilders in America. Rates below 6% could lead to increased housing construction and more permits being issued. In the current environment, some are concerned that rates will head back to 7.50% and above where the builders struggled last year. That isn’t my line of thinking, as my peak mortgage rate forecast is at 7.25% for this year, but you can understand why some builders are getting spooked by rates this high in 2025. 

For now, the Federal Reserve isn’t overly concerned. However, as illustrated in the chart above, whenever residential construction workers begin to lose their jobs, a recession is typically not far behind. This would not be a positive outcome for the U.S. While housing permits are still low, this is the current reality we face.