Massive cancellations are throwing already low new home sales into disarray. Inventory glut at the first pedestal level of deep housing. Drowning buyer traffic

Lambert here: more trouble….

By Wolf Richter, editor of Wolf Street. Originally published in Wolf Street.

New single-family home sales have been hovering at low levels for several months. In October, they were up 7.5% from September, after falling 11% in September, according to the Census Bureau today. At a seasonally adjusted annual rate of 632,000 homes, it’s down 5.8% from already low levels a year ago, and down 37% from two years ago.

These sales are based on contracts signed between the buyer and the homebuilder, and they do not indicate how many deals have actually closed. And those sales that are already approaching are much lower amid a huge wave of cancellations. Home builders have been lamenting these cancellation rates for months. But those cancellations don’t appear here. We’ll get to them in a moment.

A similar drop occurred in previously owned home sales: -34% from the peak in October 2020 and -28% from last year.

Homebuilders have reported declining traffic to potential buyers of single-family homes, according to the National Association of Home Builders last week. Its index of the movement of potential buyers has fallen for eight consecutive months and in November fell below the May 2020 level.

Far from the April 2020 closing low, it was the lowest since 2012, during the housing slowdown1. But this time, the drop was much faster than during the housing slowdown1

Spike cancellations, the worst in the Southwest.

And many of those people who show up to look at a house, who then sign a sales contract are drastically second thoughts, followed by buyer’s remorse, followed by cancellations of those contracts—and these rising numbers of cancellations are not included in the new home sales data by the Census Bureau above, which keeps track of signed contracts.

According to a survey of homebuilders by John Burns Real Estate Consulting — with a sample size of nearly 20% of all new home sales — the cancellation rate rose to 25.6% in October, up from a rate of 7.9% in October 2021 and from 10.9% in October 2019. More than a quarter of signed contracts have been cancelled! cross layout Rick Palacios JrJohn Burns, director of research (click to enlarge):

Cancellation rates vary widely by region: in the Southwest, the cancellation rate is as high as 45%. Almost half of all signed contracts are then cancelled! This was higher than the 9% cancellation rate a year earlier. In Texas, the cancellation rate rose to 39%, compared to 12% a year ago.

This kind of skyrocketing cancellation rate makes sales contract signing data a practically irrelevant number because the canceled contract is no longer an actual sale (graph via Rick Palacios Jr., John Burns, click to enlarge):

From shortage to glut: Inventories keep rising.

Selling inventory across all stages of construction jumped to 470,000 homes, up 21% from highs in October last year, and the highest level since March 2008. Compared to early stages of Pre-housing 1, it was the highest since September 2005:

Supply of new unsold homes It’s been in the 8-10 month range since April, due to a combination of lower sales and increased inventory. Supply in October was 8.9 a month, housing bankruptcy levels 1.

But supply is calculated as the number of months it will take to sell existing inventory at the current rate of sales — but the current rate of sales depends on contracts being signed, those contracts being canceled at record rates, and the fact that sales continue to fall by fueling the continuing rise in inventory.

Another thing: inflation. Just when you thought…

Single-family home construction costs – excluding the cost of land and other non-construction costs – appeared to peak in June, then slow or stall. On a year-over-year basis, the rise was supported from a historic record of 18.3% in June to 16.7% in August. But then it started to rise again and in October it achieved a new record of 18.4%. This inflation will continue to throw up surprises, just when you least expect it.

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