New home sales show why residential construction is in a recession

In today’s report, new home sales fell short of sales estimates and experienced negative sales revisions, while inventory levels increased, which explains why residential construction is in a recession.

However, today’s data doesn’t indicate a crash in new home sales. Instead, it highlights my concerns from December 2024: homebuilders are accumulating a lot of completed units for sale, and they typically refrain from increasing housing starts when the number of completed units for sale approaches 120,000. In this article, I’ll discuss the reasons behind the recession in housing starts, as well as why builders have not laid off any workers.

From Census: New Home Sales: Sales of new single-family houses in June 2025 were at a seasonally-adjusted annual rate of 627,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.6 percent (±13.3 percent)* above the May 2025 rate of 623,000, and is 6.6 percent (±16.2 percent)* below the June 2024 rate of 671,000.

Below are some charts with the new home sales data: we have sales, inventory, monthly supply and prices. As you can see, inventory is rising, but these aren’t the charts that have me concerned about the housing sector in 2025.

Completed units for sale is the key data point

The key data point that hasn’t been a significant issue in previous years is that the number of completed units for sale has reached levels that historically make homebuilders cautious about construction. A historical analysis reveals that when the number of completed units approaches 120,000, builders tend to become more conservative about initiating new home projects.

Residential labor is still holding up

Of course, many people are puzzled as to why the builders haven’t laid off people yet. As shown in the chart below, the number of residential construction workers is a key labor indicator preceding recessions.

A few key points to remember:

• The builders made a single-family labor adjustment in 2022, when new home sales were crashing that year, and new home sales have yet to fall below 2022 levels. This means that they have the right amount of labor for current levels of sales. If sales were to take another leg lower and fall below the lows of 2022, then more layoffs would be warranted.

• We have 119,000 completed units available for purchase, but we also have 119,000 homes that haven’t started construction yet; that’s an all-time high. The builders have projects ready to start construction, but they won’t begin until they have a better idea of whether they can sell them in a timely fashion.

• One last item about labor: the remodeling business has been strong in America. We have a significant number of older homes that require repair and maintenance, and the number of homeowners in America has increased substantially. Those who work in the remodeling and repair industry have seen a lot of growth over the decades, and that labor hasn’t collapsed yet.

Conclusion

This was not the best new home sales report, especially following a strong print a few months ago. However, new home sales aren’t crashing like they were in 2022, and we still haven’t seen them drop below the sales levels of 2022. The builders’ confidence data for small builders is still in the dumps.

The good news is that mortgage rates are heading toward 6%, which has helped both big and small builders sell homes and raise confidence, but for now, that is not the case.