In November, New Home Sales seriously disappointed by falling 11.3% from October levels to a seasonally-adjusted annual rate of 355,000. The rate was also 9.0% below the year-ago sales levels. The consensus expectations were for sales to be running at a 435,000 rate in November. In even worse news, October’s numbers were revised sharply lower from 430,000 to 400,000. Thus relative to where we thought we were, it is more like a 17.4% monthly drop.
The drop in New Home sales are in distinct contrast to yesterday’s report on Existing home sales, which surged 7.4% on the month and which were up 44% from a year ago. Normally, existing home sales run about 6x new home sales, but now existing homes sales are running at over 18x new home sales (see graph below from http://www.calculatedriskblog.com/). This is not only a record, it is an off-the-charts record.
New home sales are vitally important and have historically lead the economy both into and out of recessions, as can be seen in the second graph (also from Calculated Risk). Existing home sales, even though they are far larger in total number and value, are essentially irrelevant to the economy; or to be fairer, only contribute to the economy indirectly. Existing home sales do not contribute anything new to the economy, but simply shift the ownership of the existing assets. They are important to the extent that people are able to move to find new work (and with so many people trapped underwater on their hands, decreased labor mobility is an issue). However, aside from realtor commissions, most of the activity around existing home sales is due to redecorating activity.
New home sales drive construction of new homes, which uses all sorts of materials and puts people to work. We had been starting to see a rebound in residential investment, but the weak November numbers plus the sharp downward revision to the October numbers has to throw that into doubt. Still, we are near a record low for residential investment as a share of GDP, and eventually it will probably revert to more normal levels.
At the peak of the bubble, residential investment accounted for 6.3% of the whole economy, up from a long-term average of about 4.5%. In the second quarter, it hit an all time low of 2.44%, and rebounded to 2.52% of the economy in the third quarter. This downturn in new home sales, after it had started to show a promising uptrend, is some of the most disturbing economic news that I have seen in a while. New home sales have fallen sharply before every recession with the exception of 2001, and have started to increase sharply during every recession and helped pull the economy out of its slide. Unless we start to see New Home Sales pick back up in the next few months (showing that the current numbers are head fake), the recovery is going to face some very rough sledding in 2010. The tax credit has gone more towards existing homes than new homes, and so it is possible that the poor showing on new home sales has something to do with the credit being about to expire and then being extended at the last minute. However, if this is the start of a new trend, it is not good news.
The decline in New Home Sales was concentrated in the South, the biggest of the four regions when it comes to housing. New Home sales plunged 21.1% in Dixie in November and are down 14.8% from a year ago. The West was also weak with a 9.2% decline on both a month-to-month and year-over-year basis. The Northeast was down a modest 3.3% on a month-to-month basis and is down the most on year-over-year basis, off 23.7%. Things are looking up though in the Midwest with a gain of 21.4% for the month and up 23.6% from a year ago. Even with the weak showing in November, the South was still responsible for over half of all new home sales.
Inventories dropped by 2.1% for the month and are down 36.5% from a year ago. Low inventories are a good thing; builders like Lennar (LEN) and D.R. Horton (DHI) would have to cut back housing starts even more than they have, resulting in even more layoffs of construction workers (one of the hardest hit groups in this downturn). While we have plenty of housing in the country from a very long term, big picture perspective, it is not like we need to see housing starts and new home sales return to anything like 2005 or 2006 levels, but it will be almost impossible to have a healthy economy with sales at anything resembling current levels, which are below where were even in the 1960’s with a far smaller population.
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