New Home Sales Much Better Monthly, Context Still Ugly

 |  Includes: DRN, IYR, XHB
by: Alhambra Investment Partners

By Jeffrey P. Snider

Now that home sales have bounced off the winter lows, we can analyze the real estate market outside of the excuses and distractions. There is no question that May's sales rate was far better than January or February, but once again that is an amazingly low standard of comparison. In fact, May 2014's SAAR is pretty much the same as December 2012's, which puts some actual and relevant perspective on just how bad of a setback this most recent dip has been.

But even that misses the larger picture, particularly when almost everything is forecast in a straight line. When evaluating trends, we need to look not just how far below the recent peak (or how much ground has been regained) sales are, but rather how far behind what expectations were for this month before the sales collapse began. Investor action and future actions will be based largely on that perception, which is why relative changes need such context.

The current rate of activity is still running fairly behind a year ago, which presents a problem moving forward since we are right in the middle of the prime sales season. You can understand why there might be optimism about the bounce from the winter lows, but that does not necessarily portend a durable rally back to the undisturbed trend from last year. The longer the sales pace remains at a negative flow through rate, the more likely that investor expectations and perceptions will sour and fester into a secondary downward trend (which is to be expected, outside of bubble behavior such as ebbs and flows that are typical).

Part of that relates to the rise (surge) in inventory for sale. Despite the disparity in the sales rate between February/March and May, inventory levels remain elevated. That means there are now far more properties on the market that are not selling immediately than there was during the 2012-13 mini-bubble. Again, that is a potentially negative factor that only grows in importance as the sales pace remains stuck below last year's levels.

Further, the sales drop Y/Y was remarkably widespread. There certainly is concentration in the low end as institutional investors exit, but that does not account for declines all the way up to the $1mm tier. To exhibit such a broad-based deceleration is a worrying sign regardless of the month-to-month changes. That speaks to not just the dramatic decline in mortgage finance but rather the unstable pool of potential buyers.

That may be macro-related more than anything else, even having a more profound drag on sales than perhaps mortgage finance. We know that household formation has been decimated since 2012, challenging convention about this "recovery" and its assumed acceleration this year. The first quarter's sharply recessionary signal is not likely to help whatever the ebbs and flows are from here (and instead actually offers some additional corroborative evidence).