Wednesday, August 26, 2009

New Home Sales: July 2009

Subtitle: Even More Green Shoots… Still… No Bottom!

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for July showing the fourth consecutive increase in sales of newly constructed single family dwellings bringing the seasonally adjusted annual sales pace to 433,000 units or just slightly under the level seen in September 2008.

Still, demand for new homes appears to be weak falling 13.4% from last year and remaining 68.83% below the peak level 2005.

I realize that sticking with a no bottom call appears a bit “long in the tooth” at this point but my sense is that the “V” shaped recovery in new home sales (… as well as stocks, and other measures) reflects an unusually strong first half of the year bounce… strength that I think will wane as we move into the fall.

Also, I’m becoming more convinced that there is a major disappointment coming as forecasters and investors have effectively accounted for a picture perfect recovery which in all likeliness will not materialize.

Obviously, the bottom may have been set last January on the heels of the worst period of panic… at this point that is a perfectly logical conclusion.

BUT… this series is so sensitive to the economic climate that another major stumble (… S&P heads back to the low, widespread regional banking crisis, etc.) and all bets are off.

In fact, we could be at very similar point to that of the 80s double-dip recessions where new home sales strongly rebounded only to peak out and head back down to an even lower level.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)

It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions were scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

In fact, the level of completed new homes remains near PEAK levels for past housing boom periods… a truly bad sign for pricing going forward.

Look at the following summary of today’s report:


  • The median sales price for a new home declined 11.46% as compared to July 2008.
  • New home sales were down 13.4% as compared to July 2008.
  • The inventory of new homes for sale declined 35.3% as compared to July 2008.
  • The number of months’ supply of the new homes has decreased 25.7% as compared to July 2008 and now stands at 7.5 months.

  • In the Northeast, new home sales increased 9.8% as compared to July 2008.
  • In the Midwest, new home sales declined 4.7% as compared to July 2008.
  • In the South, new home sales declined 18.4% as compared to July 2008.
  • In the West, new home sales declined 14.6% as compared to July 2008.