A surprising increase in the sale of new homes doesn’t mean that overall demand for housing is on the rise. Find out what to expect for the rest of the year.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing market. It's Thursday, June 29th at 11am in New York. Jay Bacow: All right, Jim. We put out our mid-year outlook about a month ago, and since we put out that outlook, we've had a breadth of housing data and it feels like you can pick any portion of that housing data, sales, starts, home prices and it's telling a different story. Which one are we supposed to read?  Jim Egan: I think that's a really important point. The U.S. housing market right now is not a monolith, and there are different fundamental drivers going on with each of these characteristics, each of these statistics that are pushing them in different directions. Let's start with new home sales. I think that was the most positive, we could say the strongest  print from the past month. The consensus expectation, just to put this in context, was a month over month decrease of 1.2%, instead, we got an increase of 12.2%. To put it succinctly, new home sales are basically the only game in town. Existing listings remain incredibly low. We've talked about affordability deterioration on this podcast. We've talked about the lock in effect, the fact that the effective mortgage rate for existing homeowners right now is over three points below the prevailing mortgage rate. That just means there's no inventory. If you want to buy a home right now, there's a much greater likelihood that it's a new home sale than at any point in the past 10 to 15 years. And new home sales were the only housing statistic in our mid-year forecast where we projected a year over year increase in 2023 versus 2022 because of these dynamics. Jay Bacow: All right. So that's the new home sales story. Does that mean that we're just, broadly speaking, supposed to expect more housing activity? Jim Egan: This is the single most frequent question that we've been getting the past two weeks because of this data that's come in. And what we want to be careful to do here is not conflate this growth in new home sales with a swelling in demand for housing. As we stated in the outlook, we expect the recovery in housing activity to be more L-shaped. This behavior is apparent in more higher frequency data points, purchase applications for instance. 2023 remains far weaker than 2022. Average weekly volumes are down 35% year-to-date versus last year, and they're really not showing much sign of inflecting higher. In fact, if we look at just May and June versus 2019 prior to the pandemic, purchase applications are down almost 40%. Now, comps will get easier in the second half of the year. Year-over-year decreases will come down, but total activity is not inflecting higher. This is also showing through existing home sales, which are not showing the same improvement as new home sales. Existing home sales are down 24% year to date versus 2022. Also pending home sales, which missed a little bit to the downside just this morning. Jay Bacow: Okay. So when I think about the process of housing activity at the end, you've got a home sale, existing home sale, a new home sale. At the beginning, you've got either people applying to buy a home or starting to build a home. And the housing start data, that was pretty strong relative expectations as well, right? Jim Egan: It was. And the dynamics that we're discussing here, fewer existing home sales and climbing new home sales, that's leading to new home sales making up a larger share of that total number. And subsequently, homebuilder confidence is growing as a result. We think you can view this large number as perhaps a