Silver Lining in New Home Sales Provides Reason For Recovery

Includes: IYR, XHB
by: Bondsquawk, CFA

By Rom Badilla, CFA

Despite slipping in August, sales data of new homes suggest that the recovery in housing continues. According to the U.S. Commerce Department, sales of newly constructed homes fell slightly by 0.3% to an annualized rate of 373,000 units in August. The prior month sales data were revised by two thousand homes from the initial report to 374,000 units. The August print disappointed the markets since the median forecast by economists was at 380,000 homes.

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New Home Sales

Despite failing to meet expectations, the data continues to be supportive of the housing recovery as the 3-month average continues to tick higher. The average increased from 368,000 in July to 369,333 homes after today’s release. Furthermore, the August sales figure is nearly 28% ahead of last year’s level.

New home sales gained in three of the four reported regions. The Northwest region saw increased to 36,000 homes from 30,000 in July. The Midwest and West regions each gained a thousand in sales to 56,000 and 107,000 units, respectively. Conversely, the pace in the South region fell by 9,000 to 174,000 in August.

Supply remains subdued which may place upward pressure on prices and may prompt more construction of new homes. In August as was the case in the previous month, there were 141,000 homes for sale. Having said this and given the pace of sales, the number of month’s supply remained the same at 4.5 months which matches the post-recession lows.

With the limited amount of supply, prices for new homes have gained. In August, the median price for a new home stands at $256,900 which is an 11.02% gain from the previous month. Over the course of the year, the median home price has jumped by 17.0%, which is the highest year over year rate since the end of 2004.

Despite the fact that new home sales did not significantly change, the fundamentals of low supply and rising prices which infers increasing demand is a positive for the housing market. The recent move by the Fed to institute QE3 which has lowered interest rates on mortgages, should lead to increased demand for homeownership. Because of this, there is reason to believe that the current positive data on housing has some legs to it which should be good for the millions of homeowners across the country.

Disclaimer: The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees