In a very positive sign for the economy, new home sales rose by 6.2% in October to a seasonally adjusted annual rate of 430,000. This far exceeded consensus expectations for an annual new home sales rate of just 404,000. While new home sales are just a small fraction of total homes sales — on Monday, it was reported that Existing Homes Sales were at an annual rate of 6.1 million — new home sales pack a much bigger punch for the economy.
That is because they feed right into residential investment, which is a direct componenet of GDP. The economic effect of existing home sales is indirect and more muted, and mostly related to the fact that people tend to redecorate after they move into a new (for them) place. The rise in October new home sales also put new home sales in positive territory on a year-over-year basis for the first time in a long, long time. The first graph below (from http://www.calculatedriskblog.com/) is based on the actual, not seasonally adjusted new home sales numbers. On that basis, the last time we saw a year-over-year increase in new home sales was December 2005, so this is quite the milestone.
However, the increase in new home sales was not widespread regionally. All of the increase and then some came from the South, which is by far the largest of the four regions when it comes to housing. There, sales surged by 23.2% on the month and were up 8.4% year over year. As a result, Dixie was responsible for 56.7% of all home sales in October, up from 48.9% in September.
New home sales fell in every other region of the country for the month. Worst hit was the Midwest, where new home sales plunged 20.0% and are now 11.1% below year-ago levels. The Northeast and the West both registered 5.1% declines on the month in new home sales. On a year-over-year basis, the West is doing slightly better, with new home sales up 8.4% while in the Northeast new home sales are up 5.7% from a year ago.
In even better news, inventories dropped by 4.4% on the month to 239,000, and are down by 37.1% from a year ago. Combined with the faster sales pace, this has dropped the months supply metric down to 6.7 months from 7.4 month in September — and from 11.1 months a year ago. This puts us with in spitting distance of a normal level of inventories relative to sales, which is about 6 months.
During the bubble years inventory levels tended to hover around 4 months, but I doubt that we will be returning to those levels. In January, that metric topped out at 12.4 months as sales hit their low for the cycle on a seasonally adjusted basis of just 329,000. That puts new home sales up 30.7% from the bottom. That is a very nice rebound, but it was off a very low base.
New home sales peaked in mid-2005 at an annual rate of almost 1.4 million. It will be a very long time before we see those levels again. On the other hand, the big homebuilders like Lennar (LEN) and D.R. Horton (DHI) have been very cautious on starting new homes. In October, starts fell by 10.6% and were down 30.7% year over year. If these companies continue to be cautious, we might get back down to that 4.0 months of supply level sooner than I think.
Still, in the third quarter, residential investment turned into a net positive for GDP growth after 15 consecutive quarters of being a drag on growth. It looks like it is off to a good start for adding to growth in the fourth quarter as well.
Historically, housing starts and new home sales have been a key driver in pulling us out of recessions. While given the low base, the percentage gains could look very strong, the absolute level of new home sales is likely to stay low relative to history.
As the third of the graphs from http://www.calculatedriskblog.com/) shows, even with the rebound in new home sales, we are still at around the lows set in previous downturns. My best guess is that we will get back to about the 600,000 level for new home sales by the end of 2010. That will be a major factor in making 2010 a positive economic growth year, but will leave us far below the boom levels in new home sales. That seems to be about the normal level over time for the country, although the population has been growing over the time covered by the graph.
Still, the huge spike is housing during the boom years managed to pull forward demand for many years. Demand that has been pre-satisfied does not get pent up.
This was a very good report on a very important part of the economy.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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