Look To Economic Policy, Not Home Sales, For Guidance

by: Markos Kaminis

New Home Sales data were reported for July this week, and while the news was not much different than in the recent past, it received a good bit of attention nonetheless. The reason for the attention was a 0.7% decrease in the annual pace of sales from June through July. With a coinciding monthly decline in the pace of Existing Home Sales, a much more important market, concern is brewing about a new stumble for housing. While every forecast I’ve made has been qualified against the possibility of economic deterioration that appears to be developing in America and abroad, I still think too much is being made of the July New Home Sales data. Instead, both stock market and real estate investors would be better served looking to the economy, and at this point, especially to economic reinforcement efforts for guidance, as consumers and investors are suffering today from cold feet and uncertainty. If not cured quickly, I see a self-fulfilling prophecy taking us into recession.

The U.S. Department of Housing and Urban Development reported that the annual pace of New Home Sales (pdf) slipped to 298K in July, down from 300K in June. Neither enthusing, June’s sales pace was revised down to 300K, from an initially reported rate of 312K. Thus, the monthly decline felt more like a 4.5% drop.

Real estate enthusiasts should not lose sight of the fact that this July’s 298K sales pace remained 6.8% above last July’s pace of 279K. Some will say that last year’s activity came in the absence of the just expired First-Time Homebuyer Tax Incentive, and so was especially soft. They’ll point to this as the driver of the year-over-year growth in Existing Home Sales as well last month, which conflicted with the month-over-month slippage. They will be partly correct in saying so, but I continue to see a solid plateau here for housing, with one significant risk. Barring a jarring economic catalyst (read recession), which is at least 50% likely now, home prices and sales levels have a natural floor under them, in my view.

August will again offer an easy year-over-year comparable for New Home Sales, this time 278K, but September’s sales reached 316K last year. Though, October and November brought lower rates of 282K and 287K, respectively. So, the next few months will show us clearly where we stand in housing, as unnatural, synthetic catalysts will be clear of the equation. But new home sales data is not yet the place to look for real estate recovery, due to the burden of the inventory of distressed properties that abound and the relative value found in the existing home market.

One thing real estate investors should keep in mind is that the worse the economy gets, or more favorable to the general situation, the worse it is perceived to be, the better housing affordability becomes. Mortgage rates touched a record low during the latest market upheaval. Of course, recession is a net negative for housing, as unemployment would likely increase, average incomes would decrease, and the ability of consumers to spend would be limited. Consumers have already stopped spending, based on my observations, and so a self-fulfilling prophecy may play out, bringing recession and all its nastiness.

As far as last month’s New Home data went, much was made of the decrease in the median home price for homes sold through the period. The median price fell 6.3%, to $222K, from $236,800 in June. But, the average price of a new home sale actually rose a bit to 272,300, from 272K in June. Very few homes are for sale now, and so homebuilders are not so much pressured to unload inventory for the sake of managing a debt burden as perhaps they had been in past years. Even as the sales pace declined last month, months’ inventory stuck at 6.6 in July. That’s an indicator of the conservatism of builders now, and also the bare bottom levels of activity we reside within. The actual number of homes for sale declined to 165K in July, from 166K in June.

In conclusion, I believe too much was made of the decline in New Home Sales, mainly due to a dearth of other economic data on the day of its release. And, the new home arena is not the place to look for guidance anyway. Keep your eyes instead focused on the economy, and hopefully new catalysts from the fiscal end within President Obama’s upcoming game plan, and also on the monetary side within Ben Bernanke’s upcoming speech. The market is now starving for hope, and great pain has already been borne. However, if consumer and investor confidence are not supported and fueled, our economy is destined for recession and our real estate marketplace is set to find a lower plateau.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.