New Home Sales in January fell by 12.6% from December, to a dismal rate of 284,000. Relative to a year ago, sales are down 18.6%. The December rate was revised down to 325,000 from 329,000. Thus relative to where we thought we were, it could be seen as a 13.7% decline.
The level was substantially worse than the expected rate of 310,000. The nine lowest months on record (back to 1963) for New Home Sales, have all been in the last nine months. We are still down from a year ago, and it is not like a year ago was a great time in the homebuilding industry, either. Relative to the peak of the housing bubble (7/05) new home sales are down 79.5%. The very low May sales rate (282,000) was due to the end of the homebuyer tax credit.
New home sales are recorded when the contract is signed — not at closing, as is the case with used home sales. Thus the post tax credit hangover came in May for new home sales, not July as was the case for existing home sales. That effect should have long ago worn off, so you cannot attribute the weakness to the temporary distorting effect of the tax credit.
The graph below shows the history of new homes sales (blue, left scale) along with the growth in population (red, right scale), since presumably if you have more people, you will need more places for them to live. (Unfortunately the FRED database has not yet been updated for the January numbers, so the last point on the graph is December; look at it as if it is at the bottom of the little trading range at the end of the graph).
New Home Sales & Recessions
Take a very close look at the relationship between New Home Sales and the grey recession bars. New Home Sales fall sharply before all recessions (with the exception of the dot.com bust-caused recession of 2001) and then start to increase sharply in the middle of, or towards the end of, the recession. That clearly is not happening this time around.
If you want to know why the recovery has been anemic so far, look no further than the graph above! New home sales are vital to the overall economy. If new homes are not selling, then home builders have no reason to build more of them. After all, that is very expensive inventory to sit on.
Each new home built creates a huge amount of economic activity. Not only are low new home sales bad for the big homebuilders like D.R. Horton (DHI), but also for all the companies that make the products and supplies that go into making a new house. They range from Berkshire Hathaway (BRK.B) for bricks, roofing materials and insulation to Fortune Brands (FO) for plumbing fixtures and cabinets to USG (USG) for wallboard to PPG Industries (PPG) for glass and paint.
In terms of employment, it is not just all the roofers and framers that lose jobs due to weak new home sales, but employees at all the firms that make the stuff that goes into making a new home. Of course, if those employees are out of work, they are not spending on other goods and services dragging down a host of seemingly unrelated businesses.
Not that the direct impact of construction jobs should be underestimated. Since the recession started, one out of every four jobs lost has come from the construction industry.
Sales Falling Faster than Inventories
Inventories of new homes declined by 0.5% on the month and are down 19.0% from a year ago. While the decline in inventories is welcome, sales are still falling faster than they are. The months of supply is at 7.9 months, up from 7.0 months in December, and from 8.0 months a year ago. While that is well off the peak of 12.0 months, it is still above normal. A healthy market has about a six month supply of new houses and during the bubble four months was the norm, as is shown in the graph below (from http://www.calculatedriskblog.com/).
Of course, used homes are very good substitutes for a new home, and yesterday we found out that the months of supply for used homes was 7.6 months (see “Existing Home Sales Rise”). While that is a major improvement from where we were last summer, it still suggests downward pressure on existing home prices (and more foreclosure problems), which will continue to make life tough for the housing industry.
Still the absolute level of New Home Inventories is near a record low; the relatively high months supply is entirely due to the low sales rate. Eventually population growth and a higher rate (more normal) of household formation will absorb the excess inventory. Given the extremely low levels of new home starts, one does not have to imagine very high absolute levels to generate some very fancy looking percentage increases.
The third graph, also from http://www.calculatedriskblog.com/), tracks the history of New Home Inventories. Note that inventories have declined at all three levels. The biggest decline has come in completed homes. That is good news, but is swamped by the still very high level of inventories of used homes.
Results by Region
Regionally, things were all over the map. Out West, New Home sales fell a stunning 36.5% from December and are down 15.4% year over year. However, last month the West was by far the strongest of the four regions, so don’t read too much into that big month-to-month decline.
The South is the biggest and therefore most important of the Census regions when it comes to housing data. It posted a 12.8% decline on the month, and is down 17.8% year over year. Sales in the Midwest were up 17.1% from December but are down 25.5% from a year ago.
In the Northeast, sales were up a dramatic 54.5% for the month. On the other hand, year over year they are down 19.0%. The Northeast is the smallest of the four regions and at these depressed levels, the percentage changes can be very dramatic.
Very Depressing Report
Overall, this was a very depressing report. The sales pace was much lower than expected, and the absolute level continues to be dismal. This is the second month in a row of significant downward revisions to the prior month as well. That is not a good sign.
The housing sector has been a major drag on the economy for several years now. We had a bit of a glimmer of hope in the fourth quarter, as it simply stopped being a drag, and that was a big part of the reason that the fourth quarter was better than the third quarter. As Residential Investment is now a very small part of the overall economy (and new home construction is the largest part, but not all of it), further drops in new home construction will not hurt the economy much going forward, but it sure would be nice to see it on the positive side of the ledger. That will happen eventually, but clearly not yet.
The main problem right now for housing demand is the very low rate of household formation. Instead of moving out to get their own place, people in their 20’s are being forced to live with Mom and Dad, since they don’t have a job that will pay the rent or support a mortgage.
Since residential investment is such an important swing factor in creating jobs in the country (both directly and indirectly) that sets up a huge chicken and the egg problem. We are not in a robust recovery yet, but the seeds have been planted. It is unlikely that they will germinate before next spring, and it may take longer than that, but eventually they will sprout.
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