Home Sales Numbers Continue to Weigh on Developers

Last week, the new home sales report was released. Because we checked in with Director of Zacks Equity Research Dirk van Dijk, CFA regarding the earlier-released existing home sales numbers, we thought we'd get his opinion on the latest news here, as well.

We've revisited these reports before. So let me guess: you're not too impressed with new home sales numbers?

You have guessed correctly. Even by recent standards, these numbers were ugly. It looks like the spring selling season is a complete and total bust. I have to say that when the drop in housing starts came out a few weeks ago, I saw that as a sign of hope, but those hopes have been dashed.

You want to drain the sink. Yes, shutting off the water will help, but if the drain is still clogged, all you have is putrid water growing funky stuff in it. Well, that is sort of the situation we have in housing.

What were some of the actual numbers, mainly?

On a seasonally adjusted annual rate basis, new home sales were 526K in March, down 8.5% for the month and 36.6% from a year ago. Regionally, the results were a mix ranging from bad to ugly. The worst hit was the Northeast, where new home sales plunged 19.4% on the month and are down 64.6% year over year. The Midwest was only a bit better, down 12.5% on the month and down 50.0% year over year. The West was down 12.9% for the month and 39.3% year over year.

The South held up the best, with only a 4.6% decline for the month and down "just" 25.9% year over year. It is fortunate that the South is far and away the most important new home market. This month it accounted for 59.3% of all new home sales. A year ago it claimed 50.7% of all sales.

Aren't we seeing actual sales ticking up for the month?

The actual non-seasonally adjusted sales were up slightly on the month, but that always happens in the spring. A total of 51K new homes were actually sold in March, up from 47K in February, but that's down from 80K in March of 2007. However, all the improvement came from starter homes, those costing under $200K. Move up homes (>$200K, <$500K) and McMansions (>$500K) were both flat. Relative to a year ago, starter home sales are down 20.8%, Move up homes are down 40.0%, and sales of McMansions have been cut in half.

The inventory situation is getting worse, not better (which was the hope when starts fell). Yes, the absolute number of new homes on the market fell by 1.1% on the month, and is down 14.6% year over year, but that decline is not close to being as large as the decline in sales. The months of supply in inventory is now up to a stunning 11.0 months, a new record for this cycle. I have not checked, but that is most likely the highest since at least 1982. In February, the months of supply were 10.2, and a year ago they were 8.3.

Further, almost all of the decline in inventories has been up the chain. The inventory of homes not started (basically improved lots) is down 16.5%, the inventory of homes under construction is down by 27.2%, but the inventory of fully completed homes looking for a family to move in is up 4.4% relative to a year ago.

Which industries, and specific stocks, do you feel this news most clearly jeopardizes?

All of this is very bad news for the entire housing and mortgage chain -- avoid them all. Stay clear of the homebuilders like D.R. Horton (DHI), Lennar (LEN), Beazer (BZH), Standard Pacific (SPF) and Ryland (RYL).

The excess supply will continue to drive down home prices which will cause more foreclosures, so stay away from Fannie (FNM) and Freddie (FRE), S&Ls like Washington Mutual (WM) and Downey (DSL). Regional banks with big exposures to real estate like National City (NCC), Zion (ZION), Comerica (CMA), Fifth Third (FITB) and Suntrust (STI) are not the place to be either. Also avoid the Mortgage Insurers like MGIC (MTG) and PMI Group (PMI).

Dirk van Dijk, CFA is the Director of Zacks Equity Research.

Comments

[billddrummer]

It's good to see some rational commentary on the inventory overhang in housing. As long as that overhang persists, the housing crisis is in no danger of ending.