New Home Sales jumped 14.8% in April to a seasonally adjusted annual rate of 504,000. That easily beat expectations for a rise to 425,000.
Well actually, after the revisions, that would not be a rise. The March numbers were revised sharply higher to an annual rate of 439,000 from the originally reported level of 411,000. Thus new home sales are actually running 22.6% above what we thought the March level was last night.
Sales are up 47.8% from extremely low levels of a year ago. The revision to the March numbers is one more reason to expect that when the second look at the first quarter GDP is released on Thursday, growth will be revised higher than the original 3.2% rate. I would not be at all surprised to see it come in at 3.5% (the consensus is for it to be revised up to 3.3%).
The good news doesn’t stop there. Inventories actually fell by 7.0% on an absolute basis month over month, and are down 29.7% from a year ago to just 211,000. That puts the months of supply at just 5.0 months, down from 6.2 months (after the revision) in March and from 10.6 months a year ago. The all-time peak for months of supply was set in January 2009 at 12.1 months. We have not seen the months of supply this low since the bubble started to burst as the first graph below (from http://www.calculatedriskblog.com/) shows.
OK, before we get too carried away by this good news, I have to point out that new home sales are recorded when the contract is signed — not at closing, the way that used home sales are. This means that April was crunch time to get in under the wire to claim the expiring tax credit. Thus, it is very likely that we will see a bit of a hangover next month.
You would have to be pretty stupid to sign the contract on May 1st rather than April 30th. Still, it is not as if the economists who were making the projections were entirely ignorant of this, so the beat over expectations still stands.
If sales do slow again in May, then the months of supply will also tend to rise. The absolute decline in inventory is pretty significant, particularly on a year-over-year basis. It is not as if inventories were peaking a year ago, either. In April of 2009, new home inventories were already down 34.5% from April 2008. In fact, the absolute level of new home inventories is at its lowest level since 1971. Inventories are only about one third of peak levels reached in mid-2006.
The Importance of New Home Sales
It is hard to overestimate just how important new home sales are. Even though they are just a small fraction of total home sales, each new home sold generates a lot of economic activity than a used one does. Used home sales only have an indirect effect on the economy.
The rise in new home sales will allow homebuilders like D.R. Horton (DHI) to build more new houses without having to worry that they will just add to inventory and sit there, tying up capital. As they do so, they will employ many more construction workers.
Since those workers then have a paycheck, they will be able to go out and spend that money on other things, perhaps a dinner at the Olive Garden — part of Darden (DRI) — and thus provide an income to the waiters and cooks there. They will also be able to go shopping at Big Lots (BIG), keeping the marginal store open and the employees there on the job.
But things don’t stop there. Each house uses a lot of materials, things like wallboard from USG (USG) and lumber from Plum Creek Timber (PCL). Firms like plumbing suppliers such as Masco (MAS) would also benefit.
As the second chart below (also from http://www.calculatedriskblog.com/) shows, housing is usually the principal locomotive pulling the U.S. economy out of recessions. Normally the turn in new home sales comes during the recession or right as it ends.
The huge oversupply from the wild and crazy bubble years caused that to be delayed, but now it looks like the turn has come (depending, of course, on how big the hangover from the tax credit expiration proves to be). If the turn is for real, it is what will be picking up the baton from the Stimulus Act to keep the economy expanding as the stimulus starts to wind down in the second half of this year.
Remember too, that the U.S. population grows about 1% per year, so there are a lot more people in the country than there were the last time new home sales were at these levels. If you have more people, they are going to need more places for them to live. While I highly doubt that we will go back to new home sales levels of more than 1.2 million per year like we consistently ran during the bubble, getting back to around 750,000 a year does not seem like a huge stretch.
Even given the caveat about the end of the tax credit, this is a very positive report. It looks like some of the pent-up demand is starting to be released, and historically low mortgage rates are certainly helping.
Those low rates are no longer just due to the Fed buying up every piece of residential mortgage paper it could lay its hands on. That program is now over. Rather, it is due to two factors. First, there is no inflation in the system, and thus investors do not have to incorporate much of an inflation premium into the interest rates they are willing to accept. Second, it is part of the silver lining to the crisis in Europe. As people have fled the Euro, they have piled into the Dollar, and in the flight to safety, one of the preferred safe havens is U.S. T-notes. Mortgage rates generally track the 10 year t-note and that only yields 3.22% today.
It was the collapse in housing that was primarily responsible for throwing the economy into its deepest recession since the end of WWII (including the bad mortgages responsible for the collapse of Lehman Brothers, etc.). Now housing looks like it is coming back. That is extremely good news for the economy.
Yes, Europe is screwed up, and the leaders there have been disorganized — and, let’s face it, incompetent — in handling the situation there. On the other hand, some very good things are happening on this side of the pond, and last time I looked, the fate of the American economy was mostly about what happens here in America. Not entirely, to be sure, but mostly.
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.
