New Home Sales: Flat Is Better than Flattened

By Dirk van Dijk

New home sales in April were essentially flat with March, rising to a seasonally adjusted annual rate of 352,00, from 351,000, a rise of 0.3%. Given that the 90% confidence interval for these numbers is 14.5%, that is about as close to unchanged as you will get.

On a year-over-year basis, nationwide sales are down 34.0%. For the month, the Northeast and Midwest regions were unchanged, while a 1.9% increase in the huge South region offset a 3.8% decline in the West. On a year-over-year basis there is significant variation, with new home sales down 52.5% in the Northeast, but down just 25.4% in the South. The Midwest (-45.8%) and the West (-39.7%) fall in between.

As a result, the already small Northeast region has fallen to the point of being almost insignificant, accounting for only 5.4% of all new home sales. The South, on the other hand, accounted for 60.2% of sales. Keep in mind that the decline in new home sales has been going on for much longer than a year, so we are off 34.0% from an already low base a year ago.

This is the fourth straight April where new home sales have been sharply lower than the year-ago levels. The graph below (from http://www.calculatedriskblog.com/) is based on the not-seasonally-adjusted numbers, but tells the story nicely. It also points out that this year the traditional “spring selling season” has been a bit of a flop, despite record-low mortgage rates.




The best news in the report is the drop in inventories, which are down to 297,000, a drop of 4.2% from last month and down 35.4% from a year ago. This drove the months of supply down to 10.1 months from its peak of 12.4 months in January and 10.6 months in March. As the second graph (also from http://www.calculatedriskblog.com/) shows, this is encouraging, but not quite cause for celebration.

In this downturn we have seen the months of supply metric fall before, only to rise to new highs -- and the level is still far above normal. During the housing-bubble years, four months was the norm, but over the longer term it appears that six months supply would be a fairly healthy market. We are a long way from that point.



With interest rates backing up sharply, it appears that the bulk of the work to bring the months of supply back to more normal levels will have to come from further reductions in new housing starts. This is bad news for the homebuilders like D.R. Horton (DHI) and Lennar (LEN) as well as for the suppliers to the homebuilders, including lumber companies like Weyerhaeuser (WY) and roofing and insulation suppliers like Owens Corning (OC).

Overall however, we have seen worse new housing reports -- "flat" is better than "flattened." Stabilizing at a very low level is better than continuing to plunge. However, I do not see a real recovery in the cards anytime soon.

Comments

[Fighting Yoda:]

With inventories rising and prices falling, flattening maybe next. Banks are finding it harder to maintain foreclosed properties. It is either- bring on the wrecking balls or super fire sales.

May 28 03:41 PM

[Mad Hedge F...:]

the overview is still grim. That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis. (non antiquities scholars see Homer’s Ulysses).

May 29 11:14 AM

[Accuriz:]

Your New Homes Sales graph is very interesting and provides insight into the larger issue. Data accuracy and quality which is demonstrated in your second chart, Months of Inventory.

According to the Census Bureau, which produces most of the underlying data being published by so many sources; in 2003 there were 1.88 million housing permits issued and your 2004 sold unit table indicates about 1.2 million units sold. (We should compare sales from the succeeding year, because permits always proceed sales) with close to 600k in excess permits.
In 2004, 2.05 million permits and 1.3 million sales; close to 700k in excess permits (1.3 million cumulative)
In 2005, 2.1 million permits, but sales drop below 2004 levels to 1.1 million creating an excess of 1 million permits. By the end of 2006 there were 2.3 million excess permits, oversupply was shooting through the roof and in 2007 and 2008 2.2 million new permits were authorized.
The data does indicate that there is an oversupply of somewhere between 2.8 and 3.5 million excess units in the market. Based on prior trends, it will take three years for this to be absorbed (annual sales of about 1 million) if the markets are healthy.
The markets are not healthy, so until the oversupply corrects itself sometime in late 2010, market stability and revitalization will not occur. More data to support these statements will be provided over the next several days.

May 29 12:33 PM

[LKofScotland:]

there is no more rigged market than real estate. hell even the government is involved. that says never believe any price in this market EVER. it also says, "thank god for the disaster." here is the real source of corruption in our federal political system and where the real disaster of a policy response has occurred. this is the only time you will hear me say "government created inflation is good" because this policy is so corrupt and incompetent that having it morph into systemic failure (or the provierbial "train wreck") is fitting indeed. no property developers will escape unscathed from this complete collapse. And that's good because another 60-80% decline in the price for a single family home is a good thing.

May 30 11:08 PM

[Mad Hedge F...:]

Lomber traders believe it. Those fortunate few who took my advice to go long lumber futures (www.madhedgefundtrader... ) can now go out and build a bonfire to celebrate. Since then the homebuilder’s favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories. After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

Jun 02 04:39 PM