U.S. new home sales soar; consumer confidence recedes

*U.S. new home sales soared in July to 901,000, their highest level since December 2006, far exceeding expectations (Chart 1).

*The demand for new homes remains very high while the inventory of unsold homes is very low (Chart 2). The same is true of existing home sales. New construction is trying to catch up.

*While the news on housing activity is very strong, the Conference Board’s August survey reported declines in consumer confidence, reflecting the dampening impact and high uncertainty of a second wave of the pandemic (Chart 3).

The supply of houses for sale was insufficient leading into the pandemic ‑- either existing or new homes. In fact, the low inventories constrained sales in 2019. Activity plummeted during February-April 2020. Housing activity has bounced back strongly. In July, new and existing home sales reached their highest levels since late 2006. Construction is trying to catch up, but still has a way to go: both housing starts and building permits have bounced back sharply, but remain below their early 2020 pre-pandemic levels. At the same time, home improvements are booming.

New housing starts generate a multiplicative effect on the economy: they are associated with increased demand for inputs to construction (note the record-high lumber prices), have a pronounced positive impact on the consumption of household durables, and are the source of rising employment. Through July, employment in residential construction has bounced sharply, but remains below its pre-pandemic level. Today’s robust report on new home sales will contribute to a sharp recovery in residential investment in Q3 GDP following its collapse in Q3, with add-on effects to consumption and employment in the coming quarters.

The declines in consumer confidence reflected in the Conference Board’s August survey were disappointing but not surprising, in light of a second wave of COVID-19. The decline in confidence and heightened uncertainty is reflected in a flattening in economic activity, particularly in the many services sectors. Confidence is expected to be restored as a second wave of the pandemic begins to dissipate.

Chart 1.

Chart 2.

Chart 3.

Mickey Levy, mickey.levy@berenberg-us.com

Member FINRA & SIPC
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