This week brought more bad news from the housing market. Monday, the National Association of Realtors announced that sales of existing homes dropped 9.6%, to a seasonally adjusted rate of 4.88 million in February. The median price for homes sold was $156,100, which was the lowest median price since February 2002.
Two days later, the Commerce Department reported that new home sales in February fell 16.9% to an annual rate of 250,000, down from a 301,000 pace in January. That is the lowest annual rate since records began being kept in 1963, and the average price of a new home, $202,100, was down 8.9% year over year, the lowest level since December of 2003.
The inventory of existing homes for sale at the end of February rose 3.5% to 3.49 million homes, which is an 8.6 month supply. This number does not take into account the "shadow inventory" of homes that are being held off the market or are in some stage of foreclosure. Gary Shilling estimates that nearly 4.5 million home loans are in some stage of foreclosure, and large numbers of those houses will likely come to market, pushing the inventory sharply higher.
The inventory for new homes at the end of February remained flat at 186,000. However, the lower annual sales rate pushed the supply of homes to 8.9 month's worth of homes. While the slower sales rate for new homes is clearly a negative for homebuilders, the fact that physical inventory did not rise is slightly encouraging.
The price differential between new and existing homes is massive, and a poor sign of future prospects for the homebuilders. The difference, estimated by the National Association of Realtors, is about 45%, versus a historic average closer to 15%. The gap has widened as prices for existing home sales have plummeted, driven down by foreclosures and short sales, which tend to sell at a large discount to the actual market value. This is helping to drag down the prices for new homes, and at the same time forcing builders to include more upgrades to attract buyers. Both these facts point to lower margins at the homebuilders going forward, and these low margins will likely persist until the glut of foreclosures works its way through the market.
While none of those numbers are good for homeowners, banks, or homebuilders, the level of housing affordability falling is a bright spot for the economy as a whole. Prospective buyers should note, however, that new homes still sell at a substantial premium to pre-existing homes, implying that the prices of new home sales still have further to fall. Investors in homebuilders should also take that fact into account. It's hard to imagine the shares of the major homebuilders advancing much without a turn in the housing data, and when that data turns is anyone's guess
Further regulation on banks could hurt mortgage availability later in the year, adding to the uncertainty facing the sector. Lennar reports quarterly earnings before the market opens on Tuesday, and since it is best performing homebuilder in the last year, it will be interesting to see what that company says. Given the headwinds, long investors can find better places to put money to work. For investors looking for a short, Lennar's quarterly earnings provide a catalyst to move the sector.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in LEN over the next 72 hours.
