Housing Market Decline Begins as Consumer Confidence Crashes

Sales of new single-family homes in the U.S. dropped by 8.1 percentage points in June according to Census Bureau's data, plunging hopes that the housing market might avoid an imminent slowdown on the same day as new statistics reveal July's consumer confidence also fell more than expected.

New home sales had seen a modest increase in May after a slump in April, when purchases of new single-family homes dropped by 16.6 percent month-on-month to reach their lowest level since April 2020, in the midst of the COVID-19 pandemic. The same record is now held by June's rates.

But in June, new home sales were once again decreasing at a seasonally adjusted annual rate of 590,000 against May's rate of 642,000. The fall from May to June is largely attributable to the West, where new home sales fell from 177,000 to 112,000.

Year-on-year data paint an even grimmer picture than month-on-month data, with June's new home sales rate being 17.4 percent below the June 2021 estimates.

New home sales housing market
New home sales in the U.S. decreased in June, dropping to their lowest level since April 2020. In this photo, a "For Sale" sign sits in front of a new home in Miami, Florida. Joe Raedle/Getty Images

"There's no question that the demand environment is quite weak at the moment," Director of Research at Zelman & Associates Dennis McGill told Newsweek.

McGill, who explained that the Census Bureau's new home sales measure is often more volatile than the underlying market because of their sample size and frequent revision, said Zelman & Associates's data for June also showed a significant plunge in sales.

"Our June survey results were very negative, relative to the demand in the prior months," McGill said. "That view that we quantified several weeks ago with the publication of our survey has also been corroborated by public company results so far this earnings season. All of them have spoken about weaker demand in June and more buyers canceling contracts."

He added: "And that was a situation that deteriorated as you moved through the month and continued into July."

The situation isn't much different for existing homes, a category for which sales dropped for the fifth consecutive month in June, plunging by a dramatic 5.4 percent from the previous month, according to the National Association of Realtors (NAR).

Home sales are dropping at the same time as mortgage rates, interest rates and home prices are rising in the U.S., making the purchase of new (and existing) homes unaffordable for many—especially first-time buyers.

The median sales price of new houses sold last month was $402,400, while the average sales price was $456,800. These averages were slightly lower than in May when the median sales price of new houses was $449,000, and the average sales price was $511,400.

Other factors contributing to the decrease in spending power of potential home buyers are growing inflation and a looming cost-of-living crisis which is profoundly impacting consumers' wallets and chipping away at their investment. The supply of homes in the housing market also remains low, despite recent positive increases.

July's consumer confidence also dropped to its lowest since February 2021, according to the Conference Board's index released on Tuesday. The index decreased by 95.7 from 98.4 in June, falling for a third consecutive month.

Economist and financial commentator Peter Schiff, the CEO and chief global strategist of Euro Pacific Capital commented on the release of the two data saying that "the economy is clearly in #recession."

Is This a Sign of an Incoming Major Downturn?

McGill thinks "major" is a big word but doesn't argue with the fact that a downturn is coming in the housing market.

"I would say that our expectation is that we're going to see both unit, volume, as well as price under pressure for the better part of this year and through next year," he told Newsweek.

"There's a lot of challenges facing the market. Clearly, affordability is a big issue, with higher mortgage rates it is harder for people to qualify," he said. "And that's been compounded by excessive home price appreciation in the last couple of years."

Demand for homes was high during the pandemic when low mortgage rates and favorable conditions encouraged purchases by first-time home buyers as well as second-home buyers and those buying properties as investments. But now, as conditions have drastically changed, McGill says this "tremendous amount of cyclical demand" is going to start "to go against the market."

"When you have the primary buyer under pressure from an affordability standpoint as well as a confidence standpoint, and you challenge that secondary buyer piece of the puzzle as well, that's where you get the cyclical downturn in housing," he told Newsweek.

The housing market is basically adjusting itself after a period of excesses, McGill said.

"We've thought that a lot of the demand throughout the 2020-2021 period was in excess of normal demographic demand," he said. "So now we think units and price are going to be under pressure for the next 18 months at least. And that's just the nature of the cyclicality of the market."