Wednesday, February 24, 2010

Bottomless New Home Sales

Although I’m not surprised by today’s new home sales results, the lack of coverage of this important housing indicator breaking to a new all time low leaves me with a sense of… let’s call it… ironic incredulity.

For those who have not been following along, this series was fingered early last year as one of the most notable “Green Shoots” economic developments as, prompted by the immense government stimuli, it began turning up from an all time low of 329,000 seasonally adjusted annualized units.

As the government sponsored uptrend continued, many in the traditional media and elsewhere hopped on the “housing bottom” bandwagon applying their new found sense of optimism to everything from the new residential construction series to home prices to just about anything else that appeared to follow the trend.

Many, including myself, underestimated the significance of the “first time homebuyer” tax gimmick and the effect it would have on an unwind of a massive charade that had, for all intents and purposes, be made brutally obvious to all… yet the buyers came back in droves to the market mid-correction (not middle but not fully corrected) for their chance to jump and snatch that $8000 tax carrot.

With today’s new home sales numbers we see very clearly that the government gimmickry simply brought a temporary pause to an “organic” decline that is still the overarching trend.

In 2010 the housing market will be confronted again with another, even larger, housing tax gimmick and judging on the outcome from 2009, it’s safe to conclude that it will drive sales but will it finally lead to a bottom in new home sales and foreshadow a wider bottom for housing a whole?

The answer lies partially in your point of view.

If you believe that massive malinvestment in a market as large as the residential housing market of the United States of America can be fundamentally cleared through government subsidy (a conclusion that was clearly wrong in 2009), you may opt for “Green Shoots 2.0” and go with 2010 as your entrypoint into housing bottom land.

Alternatively, you can hold the point of view that markets work and as such will only fundamentally clear when all the excesses have been wrung out, all distortions revert, all losing participants lose, all failures fail and the longstanding economic trends are born out.

The following chart plotting new home sales against the median months for sale demonstrates very clearly that 2009 was NOT the bottom for new home sales.