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January New Home Sales A Head Scratcher

|Includes: HOV, Toll Brothers, Inc. (TOL)

January new home sales were reported at SAAR of 607,000, down from an upwardly revised 652,000 in December and 633,000 in January 2018.

October and November sales were also revised upward.

The data suggests that sales were rising even as mortgage rates peaked at 4.94% in mid-November, but fell back in the lead-up to the spring selling season.

This is at odds with recent anecdotal sales evidence from the builders.

Homebuilding stocks are off today on the news.  While the data interjects some uncertainty, it is subject to revision and economic factors still point intuitively to a rebound in sales this spring.

The Commerce Dept. reported January new home sales at a seasonally-adjusted annual rate of 607,000 for January.  That was down from an upwardly revised pace of 652,000 in December and also down from the 633,000 unit pace reported for January 2018.

October and November sales were also revised upward.  December 2018 sales were the strongest since last May at the tail end of what was a very solid spring selling season.  The increase in November sales occurred even as mortgage rates peaked at 4.94% in mid-November.

Intuitively, this report is a head scratcher.  The data indicates that sales of lower-priced homes, especially in the 200,000-299,000 range were up sharply as 2018 came to a close, but sales of higher-priced homes fell.  It suggests that these more price-sensitive buyers began to rush back into the market to sign contracts even as mortgage rates were peaking and that they continued to come in as rates began falling during December.

If indeed the data are correct, it could suggest that pop in sales from the recent decline in mortgage rates may be smaller than anticipated.  Homebuilders, who undoubtedly keep tabs on potential buyers, could have reached out to them as mortgage rates turned, encouraging them take advantage of falling mortgage rates and buy in December lock in affordable monthly payments.  If so, the December surge could have siphoned off some potential demand from January.

Alternatively, the new home sales data is subject to significant revisions and the delay in reporting caused by the shutdown of the Federal government in January has thrown the reporting schedules out of whack.  In some cases, this could cause problems in assigning sales (and other data) to their proper months.  However, the Commerce Dept. said that it has been monitoring process and quality issues and has identified "no systematic issues" with the data.

The drop in January sales is inconsistent with anecdotal evidence provided by homebuilders in recent weeks.  Although Toll Brothers' fiscal 2019 first quarter unit sales fell 24%, management said that the year-over-year decline eased with each passing month during the quarter.  Similarly, Hovnanian said that after a sharp drop in November contracts, sales in December and January rebounded to levels consistent with the prior year.  Both of these builders also hinted at continued improvement in sales during the month of February.

Homebuilding stocks are off modestly on the new home sales report.  While the January data does introduce greater uncertainty in the outlook for the spring selling season, intuitively it still makes sense to believe that sales will rebound sharply from 2018 second half levels as a result of lower mortgage rates, higher consumer confidence levels (vs. the prior year) and still solid growth in employment and wages.

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