New Home Sales fell 7.6% in December from November to a seasonally adjusted annual rate of 342,000. This was well below the consensus estimate of a 366,000 annual rate and even 8.6% below the year ago rate of 374,000. The major consolation in the report was that November was not as bad as first thought (the New Home Sales data is notorious for very large revisions) with a rate of 370,000 rather than the first reported rate of 355,000.
We are only slightly off the record low set back in January 2009 of a 329,000 rate. As the first graph below shows (from http://www.calculatedriskblog.com/) during the bubble, new home sales regularly topped the 1.2 million annual rate.
New Home Sales by Region
Regionally, the data was all over the place. The Northeast was by far the strongest region, with sales rising 42.9% over November and up 33.3% year over year. The problem is that the Northeast is not a very important region in terms of new home sales; even with the big increase there and the decline elsewhere, it was only responsible for 11.7% of total sales (up from 7.6% in November).
On the other hand, the Midwest got slammed with a 41.1% monthly decline and down 27.1% from a year ago. The moves in the other two regions was more muted, with sales in the West rising by 5.2% for the month but down 12.0% year over year, and in the South sales were down 7.3% for the month and off 7.8% year over year. However, the South is by far the most important region, accounting for 52.0% of all sales in December (and roughly unchanged from 51.9% in November).
Inventories Keep Declining
The absolute level of inventories continues to decline, falling to 231,000 from 235,000 in November, and down 34.0% from the 350,000 level a year ago. Absolute inventory levels have declined for 12 straight months now. However, with the slower sales rate, the months of supply metric rose back up to 8.1 months. That is up from 7.6 months in November and an interim low of 7.1 months is October, but it is significantly better than the 12.4 month peak in January 2009, or the year-ago level of 11.2 months.
For the market to really be healthy (as shown in the second graph below, also from http://www.calculatedriskblog.com/), the month's supply figure should be less than 6 months. During the bubble it was around 4 months, so that level is a sign of overheating.
The other bright spot was that there was a big month-to-month pick-up in both the median and the average sales price, with the median increasing by 5.2% on the month to $221,300 while the average was up 7.6% to $290,600. However, a year ago the median was $229,600, so it is down 3.6% year over year. The average was up 10.4% year over year.
Pricing for new homes, though, is less important than that of existing homes, since a decline does not wipe out the homeowner's wealth the way a decline in existing home prices does. A decline in new home sales does not put the borrowers underwater and in danger of defaulting and foreclosure. However, a rise in selling prices is good news for the home builders like Toll Brothers (TOL - Snapshot Report) and D.R. Horton (DHI - Analyst Report).
New Home Sales Crucial to the Economy
The level of new home sales is far more important to the overall economy than is the level of existing home sales. New home construction stimulates lots of economic activity, as the materials are used and the workers build them. Existing home sales simply transfer existing assets from one set of hands to another.
Think about it in relation to auto sales. Every month people closely watch for how many cars Ford (F - Analyst Report) or Toyota (TM - Analyst Report) are selling, but when was the last time you heard about the level of used car sales on the news? The same principal applies here.
Thus, the decline in new home sales is very bad news. Take a look at the relationship between the blue recession bars in the charts below and new home sales. New home sales tend to decline going into a recession and are a key locomotive pulling us out of a recession. It is looking more and more like this particular locomotive is derailed.
The major consolation is that the new home sales numbers for December might be revised upwards next month, but of course there is no certainty about that, and they might even be revised lower. If the current numbers stand, this is one of the more negative economic reports we have gotten in awhile now.
Lots of Support Currently Exists
Keep in mind that the low level of new home sales is happening during a time when there is massive government support for the housing market in the form of the “first time” buyer tax credit, and very low mortgage rates engineered by the Fed through its extraordinarily low interest rate regime and the buying up of $1.25 Trillion of mortgage-backed paper. Who knows how low it would be without that support.
Also the data in the graphs is not adjusted for population growth, and more people need more houses. Thus, the fact that the current sales rate is below the lowest point of the 1974-75 recession is very bad news indeed.
What Needs to Happen
For new home sales to really get back on track, we need for the employment situation to improve. However, the construction industry has been one of the hardest hit in terms of job losses this downturn, with 1.83 million jobs lost since its peak in January 2007, or 23.6% of the peak level. That is a big chunk of the total jobs lost in this downturn, especially if you factor in the manufacturing jobs that are tied to the making of construction materials, and the multiplier effects of those jobs. It is going to be very hard to get the employment situation resolved if new home construction does not pick up.
Construction historically has been a source of relatively high-paying jobs for people with relatively little formal education, but with other skill sets. Ideally, we would like to see them get jobs where they can use those skills. A "Cash for Caulkers" program might help a bit at the margins, and also have some other benefits, such as cutting down on the country’s energy usage and thus helping with the Trade Deficit. It would put them back to work without adding to the stock of unsold homes.
With still large inventories (at least relative to sales) of both new and existing homes, from a macro point of view it does not make a lot of sense to be building lots of new homes. We need for household formation to pick up. The best way to stimulate household formation, and thus real demand for housing, is through more and better paying jobs. But generating those jobs without a significant increase in residential investment is going to be difficult.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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