New home sales account for a large part of the real estate market and a significant portion of the economy.

The sale of not only houses, but also construction materials, labor wages, and appliance and home furnishings all play their part in contributing to the country’s overall GDP.

So when new home sales begin to falter, it’s important to pay attention. And that’s exactly what’s beginning to occur.

Bloomberg, Reuters, and the Wall Street Journal have all recently noted that new home sales for the first quarter of this year have begun to slow, while at the same time the inventory level of new homes continues to increase. In fact, according to Bloomberg, new home inventories are the highest they’ve been since 2009.

Read Bloomberg Article Read Forbes Article Read WSJ Article

Which begs the question, ‘Just what’s happening?’.

Economists cite various factors for the trend in slumping new home sales. Among the top causes are:

  1. Winter weather
  2. Rising interest rates
  3. Increasingly higher real estate prices
  4. Stagnant wage growth

While we respectfully point out that winter weather occurs, well, every winter, the last three factors are worth considering.

Rising interest rates combined with rising home prices and a flat wage growth are definitely cause for concern. Not just for people buying and selling homes, but for the overall economy as a whole.

We’ve been warning for some time now how the Federal Reserve’s removal of QE combined its balance sheet unwinding, along with the reduction of US Treasury purchases by China, will cause interest rates to rise — and if they don’t, it would mean the market is suggesting that a recession is coming.

In prior posts, we discussed how high technology companies have caused real estate prices to increase so much that people are actually leaving traditional technology centers such as San Francisco and Southern California for smaller markets like Nashville and Grand Rapids, Michigan.

While President Trump’s goal of Making American Great Again by bringing companies, capital, and jobs back to the US is well-intentioned, his use of tariffs on the imports from other countries is likely to create disastrous unintended consequences.

Retaliatory tariffs by China, a rise in the price of building materials, and a weakened US Dollar combined with lower export activity is more likely to hurt rather than help the overall economy going forward.

We believe the housing market is primed to roll over just as it did between 2005 and 2006 while the economy was then also looking good.