New home sales unexpectedly surged much more than economists projected in August even though same-day data showed prices collapsing due to a dearth in demand—fueling volatility that some experts argue could signal that the housing market slowdown could hike up the odds of a recession.
About 685,000 new single-family houses were sold last month on a seasonally adjusted annual basis, climbing 29% above the July rate of 532,000 and coming in much higher than analyst projections averaging 500,000, the Census Department reported on Tuesday.
“The leap in new home sales is either unbelievable . . . or unsustainable,” Pantheon Macro chief economist Ian Shepherdson said in a note after the release, pointing out the margin of error on the data is about 18%, but adding that the surge could reflect a rush of purchases by people who locked in on rates as they began to climb again last month.
In a statement, John Fish, the CEO of building giant Suffolk Construction, said the volatility in new and existing home sales is a “possible indicator we are in the early stages of a recession,” though he added it’s “too soon to predict how long or severe” the recession could be.
Despite the increased sales, the median price of new homes sold sank to $436,800 from a record high $466,300 in July, and earlier on Tuesday, S&P reported home prices cooled at the fastest rate on record in July, increasing 15.8% after an 18.1% increase in the previous month.
According to economist Odeta Kushi of First American, leading indicators such as building permits and confidence indicate ongoing weakness in the housing market despite the surging sales; she also points out it’s likely the overall cooling will continue into the fall with mortgages now back above 6%.
Shepherdson expects a “sustained decline” in the sector through next spring, with prices falling as much as 20% from their peak by the middle of next year, while the National Association of Realtors projects the median existing home price could fall more than 5% to 380,000 by the end of this year.
Home buying demand skyrocketed during the pandemic as interest rates collapsed and an influx of Americans started working from home. However, the Federal Reserve’s interest rate hikes have quickly spurred a reversal since March, and some experts worry about the broader economic implications. In a recent note, Bank of America economist Michael Gapen downgraded his economic forecast as a result of the steeper-than-expected housing market decline. Home buying represents about 5% of GDP, so the health of the housing market may influence the likelihood of recession, according to wealth advisory Glenmede.
“The surprisingly large increase in new home sales in August can only be explained by an effort by home builders to move inventory of new homes by lowering the price of those homes,” says Raymond James chief economist Eugenio Aleman. “This is how the market should work, and it is a clear indication that the slowdown in housing is proceeding in an orderly fashion.”