Homebuilders rant about the tough market.

By Wolf Richter for WOLF STREET.

Inventory of completed new single-family homes for sale jumped to 123,000 homes in August, the highest since June 2009, up by 18% year-over-year, and up 62% from August 2019, according to data released today by the Census Bureau.

These essentially move-in-ready “spec homes” form the part of the inventory that homebuilders are most motivated to sell since they have a lot of capital tied up in them.

But inventory of homes at all stages of construction dropped by 14,000 homes in August from July, to 490,000 homes.

All of that plunge occurred in the South, where inventory plunged by 15,000 new houses for sale, a huge outlier (more in a moment).

This plunge was powered by the inventory of homes under construction, which plunged by 23,000 homes (-8.1%), to 262,000 homes, even as the inventory of completed homes jumped. That -8.1% was the biggest month-to-month plunge since December 2008.

But even at 490,000 homes, total new home inventory for sale was still up by 51% from August 2019, and by 3.4% year-over-year. And

In the South, new-home inventory plunged by 15,000, a huge outlier plunge from record levels, to 295,000 homes for sale, still above the Housing Bust level, and up by 78% from August 2019.

This one-month wonder in data that is subject to heavy revisions will likely be revised back in direction of the recent mean over the next two months.

The South accounted for 60% of total US new home inventory.

Sales, another one-month wonder to be revised: Sales of new single-family homes spiked to a seasonally adjusted annual rate of 800,000 in August, by far the highest since December 2021, up by 20.5% from the prior month, and up by 15.4% from a year ago, according to the preliminary data released today by the Census Bureau.

That spike occurred due to an outlier spike in the South (more in a moment). Outliers like this are generally revised back in direction of the recent mean over the next two months.

All of this spike occurred in the South, where sales spiked by 25.7% from the prior month and also by 27.5% year-over-year, to 44,000 new homes sold (not seasonally adjusted, not annual rate), by far the highest since March 2021, around the peak of the free-money boom. I expect this outlier spike to get revised back in direction of the recent mean.

The South, a huge Census Region that is dominated by Texas and Florida, accounted for 67% of total US new-home sales in August (a US map of the four Census regions is below the article at the top of the comments).

Homebuilders reported in quarterly filings that they pushed sales with incentives, price cuts, and aggressive mortgage-rate buydowns, particularly in the South where unsold inventory has been stuck for over a year at the highest levels ever.

Lennar reported last week that the average price of the homes it sold in Q3 through August, including all incentives, dropped by 9.2% year-over-year, and by 22% from the peak in Q3 2022 (more in a moment).

Its gross margins dropped to 17.5% in Q3, from 22.5% a year ago (and from 29.2% in Q3 2022!), “primarily due to a lower revenue per square foot [lower prices per square foot] and higher land costs,” that were only “partially offset by a decrease in construction costs,” the company said in its filing.

With these efforts, Lennar was able to maintain its unit sales volume, which edged up year-over-year, even as its revenues from homebuilding fell 8.8%, while operating earnings from homebuilding plunged by 49%, net income plunged by 50%, and earnings per share plunged by 46%!

“Sales volume was difficult to maintain and required additional incentives in order to achieve our expected pace and to avoid building excess inventory,” Lennar co-CEO Stuart Miller said during the conference call.

So I expect this sales spike in August, as reported by the Census Bureau — which contradicts what homebuilders have been saying — to be revised down over the next two months.

Prices….

The median price in August rose month-to-month to $413,500, but July was revised down today to $395,100, the lowest since July 2021, according to the Census Bureau (blue in the chart below).

The three-month average, which irons out some of the month-to-month squiggles and includes the revisions, dropped to $404,067 (red), the lowest since September 2021.

Year-over-year, the three-month average was down 2.9%, and compared to the peak in late 2022, it was down 6.3%. It’s the three-month average that matters, not the month-to-month to-be-revised squiggles.

But the Census Bureau tracks sales prices of new houses by the prices written into purchase contracts that buyers signed. These contract prices do not include the costs of mortgage-rate buydowns and some other incentives.

With the costs of the buydowns and incentives included, home prices fell further – we know that from builders’ quarterly financial reports, such as Lennar’s average price of homes sold. More in a moment.

The price explosion in 2020-2022, when FOMO-and-free-money-addled buyers were willing to pay whatever, led to the profit explosion at homebuilders: Lennar’s gross profit margin exploded to 29% during that time, and it’s now back to 17.5%.

Lennar’s average sale price, including incentives: Lennar disclosed that its incentive spending jumped to 14.3% of revenues in Q3, due to the costs of mortgage-rate buydowns and other incentives, the highest incentive spending rate since 2009.

Lennar’s average price per home sold dropped to $383,000 in Q3, down by 22% from the peak in Q3 2022, and below its average sales price in 2019 [I discussed this here: Lennar Cuts Average Selling Price Below its 2019 Level, and its Home Sales Held Up].

These big homebuilders have to maintain their businesses, and have to find the mix of price points and incentives at which they can build homes and sell them, and they sacrifice some of their fat profits to get there. They cannot decide to just outwait this market.

And it shows just how tough this market is, and what it takes to maintain unit-sales volume:

Inventory for sale by region.

For inventory and sales in the South, see above.

In the West, inventories of new homes for sale edged down to 110,000 homes in August, up by 1.9% year-over-year, and up by 28% from August 2019 (a US map of the four Census regions is below the article at the top of the comments).

Sales in the West dropped by 8% year-over-year to 12,000 new homes (and the prior two months were revised lower).

The West, dominated by the mega-market of California, accounted for 18% of the total US inventory and for 22% of total US sales.

In the Midwest, inventories of new homes for sale in August ticked up to 53,000 homes, the highest since January 2009, and July was revised higher. Year-over-year, inventory jumped by 26%, and compared to August 2019, it jumped by 41%.

In the Northeast, inventory rose to 33,000 homes, up by 22% year-over-year and by 18% from August 2019.

The Northeast is a relatively small area with big densely populated cities where multifamily housing (condos and apartments) is a far bigger part of new construction than single-family housing.

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WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.