Thursday, March 26, 2009

Not The Normal Pattern: New Home Sales

A few good days on the stock market and everyone thinks the sun has come out… these are delusional times indeed!

In this randomly recurring post I will attempt to persuade optimistic readers (particularly those readers who still have latent Bullish tendencies) to feel otherwise and further, if you know what’s good for you, to prepare for a decline that is more than likely shaping up as the worst of all possible scenarios.

You see… what we are experiencing today is NOT the normal pattern.

So you can spend all the time you like dwelling on the macroeconomic data of the last sixty years and traversing the curves… comparing… extrapolating… But you know what you’re not going to find?

You’re not going to find a period like we find ourselves in today.

What’s happening today is NOT normal.

What is normal anyway?

Certainly nothing that occurred in the last fifteen or twenty years was very normal… a stupendous speculative frenzy in the hi-tech sector and associated collapse followed somewhat simultaneously and subsequently by a truly astonishing binge of debt and delusion leading to an even larger speculative bubble and a truly widespread and catastrophic collapse.

So seeing what appears to be an endless stream of macroeconomic data drop off cliffs or shoot to the moon should come as no surprise.

We ran the system into the ground and now we will all get what we deserve… this is not a new story… no need to seek the advice of Nostradamus-types to see how this episode will play out… just brush up on your Aesop.

Today, I’ll start the series with some of the most recent data, yesterday’s “ray of sunlight”, the New Home sales and prices series.

As you can see by the following chart (click for larger) that plots new home sales and the year-over-year change to the monthly supply of new homes (all the data there is way back to 1963) the period between 1990 and 2005 saw new home buyers and home builders go on quite a binge… easily the largest and most extended period of new home building and selling in at least the last 40+ years.

Of course, after the jig was up things took a turn for the worse and if you look very closely you can see that the worst is, more than likely, not over for new home sales and prices.

Because the dramatic, nearly 20 year, bull-run in new homes was so colossal, the crash phase has been equally fantastic.

Probably the most important take away from the chart is that the months of supply is still growing at a non-seasonally adjusted annual rate of 21%, not a good sign for sales or prices.

Next look at a chart of the “real” median selling price of new homes (adjusted with CPI less shelter) versus the year-over-year change to the monthly supply of new homes.

As you can see from the chart, although real median selling prices have come down quite a bit there will more than likely be no meaningful bottom in the median selling price until inventories are sold off and the months of supply trends down substantially.

Finally, look at an important indicator of the job picture, the population adjusted continued jobless claims versus the year-over-year change to the monthly supply of new homes.

As you can see from the chart, continued claims are continuing to surge while the months of supply also continues to grow substantially… not the makings of an environment conducive to a turnaround for the new home market.

So, have we reached the bottom in new homes sales and prices?… not likely.

The new home market is seriously impaired with a large overhang of inventory and a slowing sales pace likely as the direct result of homebuyers facing the worst job and confidence situation of their lifetimes.