New Home Sales in February fell by 16.9% from January to a dismal rate of 250,000. Relative to a year ago, sales are down 28.0%. In a very faint silver lining to an otherwise dismal report, the January rate was revised up to 301,000 from 284,000. Thus relative to where we thought we were, it could be seen as a 12.0% decline.
The level was substantially worse than the expected rate of 288,000. The ten lowest months on record (back to 1963) for New Home Sales have all been in the last ten months. February is a new all-time record low.
We are down sharply 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 (July 2005), new home sales are down 82.0%.
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.
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.
New Home Sales Crucial to Growth
Unlike used home sales, 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 to International Paper (IP) for lumber.
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.
New Home Inventories
Inventories of new homes were unchanged on the month and are down 19.8% from a year ago. While the decline in inventories from a year ago is welcome, sales are still falling faster than they are. The months of supply is at 8.9 months, up from 7.4 months in January, and from 8.0 months a year ago. While that is well off the peak of 12.0 months but 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 on Monday we found out that the months of supply for used homes was 8.6 months, up from 7.6 months in January (see “Used Home Sales Plunge”). 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, though 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; not started is basically improved lots. The biggest decline has come in homes under construction. The decline in the absolute level of inventories is good news, but is swamped by the still very high level of inventories of used homes.
Results by Region
Regionally, things were ugly everywhere, but there are differences in the level of ugliness. In the Northeast, New Home Sales fell a stunning 57.1% from January and are down 50.0% year over year. The Northeast is the smallest of the four regions, and low absolute levels can make for big percentage changes.
The South is the biggest and therefore most important of the Census regions when it comes to housing data. It held up the best, posting “only” a 6.3% decline on the month, and is down 17.8% year over year. Sales in the Midwest were down 27.5% from January, and are down 40.8% from a year ago. Out West, sales were down 14.7% for the month and were off 34.1% year over year.
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. The only good thing in the report was the upward revision to January.
If anything, the report’s headline numbers understate just how dismal things are. Not only were fewer houses sold than at any time since Jack Kennedy was in the Oval Office, but the value of the homes that were sold is down sharply as well. The median price of a new home sold fell 13.9% from January to $202,100 and is 8.9% below a year ago.
Looking at average prices, they are down 7.3% for the month and off 13.4% year over year to $246,000. A small starter house being sold represents less economic activity than a McMansion being sold.
With the prices of used houses falling again, it makes selling a new home that much tougher. After all, a used home is a very good substitute for a new home. The housing sector has been a major drag on the economy for several years now. We had 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 of, but not all of it), further drops in new home construction will not hurt the economy as 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. This report indicates that in the first quarter it may yet once again be a drag on the overall economy.
The drop from January to February is a bit on the unusual side, but not unprecedented. The next graph shows the absolute level of new home sales, not seasonally adjusted each month going back to 2005 and the height of the bubble. Seasonally, March should be the strongest month of the year on an absolute basis.
Main Problem: Low Household Formation
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 this spring, and it may take longer than that (but eventually they will sprout).
The lack of a housing recovery is the key difference between this recovery and every other one which has preceded it. The collapse of the housing sector is directly responsible for a quarter of the jobs lost, and indirectly responsible for many more than that. The loss of jobs has, in turn, depressed household formation, and thus further depressed the housing market. Even extremely low mortgage rates have not been enough to get things going again.
We still have extremely high vacancy rates, both of apartments and of houses sitting empty, although lately we have seen some improvement in the rental market. Until that excess is absorbed, it is unlikely that we will get anything like a robust housing sector, although even a tripling of the New Home Sales rate from current levels would bring us to what was considered a normal rate of sales back in the 1970’s and 1980’s. Back then we had far fewer people, and thus a lower need for places for people to live. However, like a kidney stone, this too shall pass.
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