We’re Watching This Indicator Like Hawks

Genevieve Signoret & Delia Paredes

(Hay una versión en español de este artículo aquí.)

First we want to shout out our praise to Eric Basmajian for his recent primer on the how to interpret U.S. existing and new home demand and supply indicators in tracking the business cycle. We discovered it because he generously tweeted the whole piece out, and Genevieve has him on her list of tweeps whose content she has designated “daily mandatory reading”.

The U.S. indicator referred to in the title of this article is Months of New Home Inventories. We’re watching it like hawks because it’s signaling that this market is sharply out of balance. We know from Basmajian that a good rule of thumb for checking whether the market is in balance is that Months of Inventories will be around 6. Today it’s at 9.3 months and trending up. Moreover, the house market guru tells us, the proportion of that inventory that is complete (versus still in process) is “getting past average and into the range consistent with recessions and job losses for construction crews.”

The problem of course is weak demand driven by high interest rates.

Monthly supply of new houses in the United States (months’ supply)

Source: FRED.

For our No Landing base case to come true, we’ll need among other things for the Fed to start to cut rates no later than September, for monetary policy rate cuts to translate quickly into falling mortgage rates, and for the demand for new homes to respond quickly and sharply to the drop in mortgage rates.

We remain confident in No Landing but not so confident that we dare for a minute take our eyes off Months of New Home Inventories.

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