For Immediate Release
Chicago, IL – May 27, 2010 – Zacks.com Analyst Blog features: D.R. Horton (DHI), Darden (DRI), Big Lots (BIG), USG (USG) and Plum Creek Timber (PCL).
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Here are highlights from Wednesday’s Analyst Blog:
New Home Sales – WOW!
New Home Sales jumped 14.8% in April to a seasonally adjusted annual rate of 504,000. That easily beat expectations for a rise to 425,000.
Well actually, after the revisions, that would not be a rise. The March numbers were revised sharply higher to an annual rate of 439,000 from the originally reported level of 411,000. Thus new home sales are actually running 22.6% above what we thought the March level was last night.
Sales are up 47.8% from extremely low levels of a year ago. The revision to the March numbers is one more reason to expect that when the second look at the first quarter GDP is released on Thursday, growth will be revised higher than the original 3.2% rate. I would not be at all surprised to see it come in at 3.5% (the consensus is for it to be revised up to 3.3%).
The good news doesn’t stop there. Inventories actually fell by 7.0% on an absolute basis month over month, and are down 29.7% from a year ago to just 211,000. That puts the months of supply at just 5.0 months, down from 6.2 months (after the revision) in March and from 10.6 months a year ago. The all-time peak for months of supply was set in January 2009 at 12.1 months. We have not seen the months of supply this low since the bubble started to burst.
OK, before we get too carried away by this good news, I have to point out that new home sales are recorded when the contract is signed — not at closing, the way that used home sales are. This means that April was crunch time to get in under the wire to claim the expiring tax credit. Thus, it is very likely that we will see a bit of a hangover next month.
You would have to be pretty stupid to sign the contract on May 1st rather than April 30th. Still, it is not as if the economists who were making the projections were entirely ignorant of this, so the beat over expectations still stands.
If sales do slow again in May, then the months of supply will also tend to rise. The absolute decline in inventory is pretty significant, particularly on a year-over-year basis. It is not as if inventories were peaking a year ago, either. In April of 2009, new home inventories were already down 34.5% from April 2008. In fact, the absolute level of new home inventories is at its lowest level since 1971. Inventories are only about one third of peak levels reached in mid-2006.
The Importance of New Home Sales
It is hard to overestimate just how important new home sales are. Even though they are just a small fraction of total home sales, each new home sold generates a lot of economic activity than a used one does. Used home sales only have an indirect effect on the economy.
The rise in new home sales will allow homebuilders like D.R. Horton (DHI) to build more new houses without having to worry that they will just add to inventory and sit there, tying up capital. As they do so, they will employ many more construction workers.
Since those workers then have a paycheck, they will be able to go out and spend that money on other things, perhaps a dinner at the Olive Garden — part of Darden (DRI) — and thus provide an income to the waiters and cooks there. They will also be able to go shopping at Big Lots (BIG), keeping the marginal store open and the employees there on the job.
But things don’t stop there. Each house uses a lot of materials, things like wallboard from USG (USG) and lumber from Plum Creek Timber (PCL).
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