There seemed to be not much we could glean from the New Home Sales (.pdf) data for October generally speaking, but after a more painful closer look, there are nooks full of grime and crannies full of malaise worth discussing after all.
In recent articles on real estate and homebuilders, we noted that the global macroeconomic meltdown would likely not leave out homebuilders. We were wondering this week if our detractors, a group basically consisting of homebuilder long positions today, noted the apocalyptic warning from the OECD Monday or Fitch’s U.S. outlook downgrade Tuesday. Well, they’ll argue that the efficient stock market blew off the news, with the Dow up both Monday and Tuesday on record Black Friday and Cyber Monday retail sales. Housing stocks rallied as well, with PulteGroup (NYSE: PHM) up 2.5% Tuesday, K.B. Home (NYSE: KBH) up 0.9%, Toll Brothers (NYSE: TOL) 0.5% higher and D.R. Horton (NYSE: DHI) increasing 0.3%. Now I’ll tell you why I think the week’s stock buyers will regret it down the road.
October’s New Home Sales were reported at the start of the week, and not much was made of the news. There was good reason for that; it’s because not much changed generally speaking. The annual pace of new home sales rose 1.3% month-to-month, to 307K, from a revised September pace of 303K. The sales pace was 8.9% greater than the year ago period, thanks to the low bar set when housing was left to its own devices absent of the First-Time Homebuyer Tax Incentive. I should note that this last bit of information is overlooked by the biased among us.
Economists were looking for a sales pace of 310K, so 3,000 more than the actual result. Clearly, the miss was insignificant. In fact, the entirety of the report seemed insignificant, except to regional markets and discerning eyes. Breaking the data down, we see that sales in the Midwest were red hot, surging 22.2% over September’s pace and 37.5% above the prior year rate. I expect this has at least something to do with the energy boom in North Dakota, if not all to do with it. That’s because the biggest barrier to growth in the state’s energy production boom has been inadequate housing capacity. Still, this is great news for the local housing market and builders participating there.
The western region of the nation also enjoyed a surge in activity (+14.9%), taking it to a level not seen since the spring. The Northeast was even with September’s pace, but the South reported a 9.5% drop off.
Another noteworthy tidbit was the dip in housing inventory to 6.3 months, down from 6.4 in September. Supply was 8.5 months a year ago. You would think that we would eventually reach a point of equilibrium. Month-in and month-out this development in inventory is viewed positively, seen as another step toward growth revival. At some point, inadequate supply and absent production should leave a housing shortage. That’s not the case though in a nation that is not creating jobs. Rather, empty nester homes are refilling with an increasing number of family members, children returned from college or Iraq, and brothers returned from Wall Street or prison, etc.
The final data point most often observed here is the home price information. As seen in the S&P Case Shiller data, though in this case it’s timely, new home prices fell. Obviously, that’s not a good sign for real estate nor for homebuilders. But stock valuations have an important component reflecting future expectations, the longs will remind us. Well, then it would seem fiat currency dilution for the sake of debt digestion will simply result in the penalization of all the world for the faults of those who partook in excessive leverage and who were possessed by greed. That’s not good for the homeownership rate either my friends.
However, I have one caveat for you real estate survivors: if you already own your own home, then that hard asset with the extra benefit of utility value, including the ability to rent it or to provide you with shelter, will benefit from the inflation I see ahead. In conclusion, it would seem this mundane report with seemingly stagnant data did prove quite interesting after closer inspection.