In distinct contrast to the existing home sales report last week, new home sales were ugly in September, falling 3.6% for the month and down 7.8% year over year. The seasonally adjusted annual rate in September was 402.000 down from 417,000 in August, which was revised down from the originally reported 429,000. This came in well below consensus expectations of 440,000.

The good news in the report was that inventories also continued to decline, to 251,000 from 261,000 in August (down 3.8%) and from 395,000 a year ago (down 36.5%). That kept the months of supply metric even at 7.5 months, a big improvement over the 10.9 months of a year ago, and the scary peak of 12.4 months in January.

There is a distinct seasonal pattern to new home sales as can be seen in the graph below (from http://www.calculatedriskblog.com/), which tracks the actual non-seasonally adjusted sales per month since 2003. The good news is that this weak report is coming for one of the seasonally least important months for new home sales. Before the revisions to last month’s data, it had been the first time there was an actual year-over-year gain in actual new home sales since January 2005, but that was erased due to the revisions.

The comps keep on getting easier, so I would not be surprised if we do see a year-over-year gain in the near future. That however, will not signal a return to health in the new home market.

Regionally, the data were all over the map on both a month-to-month and year-over-year basis. Unfortunately, it was the bigger and more important regions (at least from the perspective of housing) that did the worst. The super-sized South region saw a 10.0% decline for the month and is down 23.6% year over year. However, even with the decline it still accounted for 48.6% of all new home sales in September, though that is down from 56.4% a year ago.

The West saw a 10.6% decline for the month and is now down 1.0% year over year. In distinct contrast, the Midwest saw new home sales soar 34.0% for the month and sales are now running 12.7% above the year ago pace. The Northeast, traditionally the smallest region, was unchanged on the month but has seen a huge rebound from a year ago, up 68.0%. Put another way, the Northeast share of total new home sales has risen from 5.7% a year ago to 10.4% now. Of course, the Northeast has more exposure to the Financial sector than the rest of the country (Wall Street is, of course, an actual street in the Northeast) and a year ago not too many financial types were thinking about buying a new home, so the 5.7% was abnormally low.

The other noteworthy thing about the report was that prices rose sharply, both median and average. For the month, median prices rose 2.45%, although they are still down 9.1% from a year ago. Average prices posted an even stronger rise, up 10.1% on the month and down just 1.6% from a year ago. That probably is mostly a reflection of the regional trends, as housing is far more expensive in the Northeast than it is in the South.

This report should take some of the wind out of the sales of the homebuilders like Beazer (BZH) and Lennar (LEN), which have had spectacular rallies off their lows earlier this year. While new home sales are just a small fraction of the total home sales (existing home sales were at an annual rate of 5.57 million in September while new home sales were at a rate of just 402,000), they do make a much bigger difference to GDP growth. Residential investment has been a consistent drag on GDP for almost four years now. Even with this month’s weak report, the level of drag from housing on GDP should be much less in the third quarter than it has been in a long time.

 

 

One would have expected a much stronger month for new home sales with the end of the first-time home buyer tax credit looming at the end of November. It now looks like the credit is not only going to be extended, but it is going to be expanded. The word from Calculated Risk is that the shape of the new tax credit will be:

  • Income eligibility for first-time home buyers stays at $75,000 for individuals and $150,000 for couples
  • For move-up buyers, income eligibility is $125,000 for individuals and $250,000 for couples
  • There is a minimum 5-year residency requirement in their current home for move-up home buyers
  • The tax credit is the lesser of $7,290 or 10% of the purchase price
  • The credit runs from Dec. 1, 2009 to Apr. 30, 2010, with an additional 60-day period to close escrow. (so the end of April to sign contract, end of June to close escrow)
  • Expect bill to be signed by Friday.

The program so far has been extremely expensive and has for the most part rewarded people who would have bought anyway. It has also been riddled with fraud. However, the realtors are a strong lobby and have members in every Congressman’s district.

The extension is even worse economics than the original program and just plain bad when it comes to equity, as it will be available to move-up buyers now, including people who are earning as much as five times the median household income. At least with first-time buyers it was moving people from being renters to being owners. While that will have some adverse unintended consequences of driving up rental vacancy rates and putting more pressure on rents (and thus making commercial real estate even more of a mess than it is now), at least it does sop up some fo the inventory of formerly foreclosed homes.

With move-up buyers there is no impact on inventories, as they will be putting one house on the market for every one that is taken off. Now it is just subsidizing people who want to move up to a bigger house.

Why should taxpayer money be spent for this? I see no social good that comes from this expenditure, except that it props up the value of housing assets. With millions of vacant houses across the country, and millions of people homeless, why is the nation so afraid of housing that people can actually afford?

Trying to use tax money to prop up asset values, especially for an extremely large asset class is in the long run doomed to failure. What happens after April of 2010 — do we expand this turkey of a program even more? If not, housing prices are likely to resume falling then. By then as well, the Fed is supposed to be finished with its $1.25 Trillion purchase program of mortgage backed paper issued by Fannie Mae (FNM) and Freddie Mac (FRE).

When that program ends, mortgage rates are likely to rise sharply. We could be looking at some serious ugliness come next spring as a result. In the meantime, at a time of very problematic federal deficits, we are spending billions to subsidize the relatively well-off for what, in most cases, they already would have done.

That’s not stimulus, it’s stupidity. The cost for each house sold above and beyond what would have sold in any case will probably be on the order of $80,000 to $100,000, or close to half the cost of a median new home in September.

Read the full analyst report on “BZH”
Read the full analyst report on “LEN”
Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
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