In January, New Home Sales fell to an annual rte of 321,000 from 324,000. However, it was only a decline due to a big upward revision to last months numbers, which were originally reported as a 307,000 annual rate. Also it was better than the consensus expectations of a 315,000 annual rate. Relative to a year ago, they were up 3.5%.
This is still an extremely low level of New Home Sales. Thus despite the beat and the big upward revision to last month it is hardly a reason to break out the champagne. In fact the lowest 20 months on record have all been in the last 20 months, and sales have been deeply depressed for a lot longer than that. The peak in July of 2005 was an annual rate of 1.389 million. Keep in mind that these records go back to the early 1960’s and the population was a lot smaller then than it is now.
The good news is that inventories continue to decline, for both new and used houses. The number of new houses for sale is now down to 151,000 from 154,000 last month and down 22.2% from 186.000 a year ago. That is 5.6 months of supply, down from 7,2 months a year ago, and it is now at a historically normal months of supply. The raw inventory numbers continue to set record lows.
The same is true for used homes (reported on Wednesday) where we now have 6.1 months of supply, which is a historically normal level. That suggests that the relentless downward pressure on existing home prices will soon come to an end. Given the delays in the housing price indexes, we will not see that for a few months, but we should see it. In a given community, a used house is a very good substitute for a new house, and the falling prices of existing homes has it made it difficult for the homebuilders to compete.
By region, the biggest monthly gain came from the Northeast, which is by far the smallest of the four census regions, with a 11.1% increase. However on a year over year basis it fared the worst, with a 39.1% drop. The low absolute numbers are responsible for the volatility. The Northeast was responsible for just 6.2% of all new houses sold in January, up from only 5.6% in December.
The next best was the South, by far the biggest of the regions, with a 9.3% gain. It was also the strongest on a year over year basis with a 15.3% gain. The south was responsible for 58.6% of all new homes sold in January, up from 53.1% last month.
The Midwest was very weak, suffering a 24.5% drop on the month, and down 11.9% from a year ago. Out West, sales fell 10.6% for the month, but are up 5.6% from a year ago.
Considering the revisions, things are starting to move in the right direction, but we have a very long way to go before we are at anything like a normal rate of New Home Sales. We will probably not get up to the previous peaks for decades, but with the economy recovering and the population growing, we will start to build and sell more new homes. The average level of new home sales since 1963 is 670,000, so it would take more than a double to get back to average, not counting any effect from the pent up demand of four years of extremely low levels of sales.
Each new home built and sold represents an enormous amount of economic activity, not just the direct employment of the homebuilders of carpenters and plumbers, but of all the products that go into building a home. A recovery to just an average level, would be a huge boost to overall economic activity, even if it took us three or four years to get there.
That would mean very good things not just for the big builders, like D.R, Horton (DHI) but also for firms like Plum Creek Timber (PCL) and Masco (MAS) as well. Housing has been the key reason for the rather anemic recovery we have seen so far, but it also has the potential to provide much stronger economic growth over the next few years than most people now expect.
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