New Home Sales Flat

But "Flat" Is Better Than "Flattened"

New home sales in April were essentially flat with March, rising to a seasonally adjusted annual rate of 352,00, from 351,000, a rise of 0.3%. Given that the 90% confidence interval for these numbers is 14.5%, that is about as close to unchanged as you will get.

On a year-over-year basis, nationwide sales are down 34.0%. For the month, the Northeast and Midwest regions were unchanged, while a 1.9% increase in the huge South region offset a 3.8% decline in the West. On a year-over-year basis there is significant variation, with new home sales down 52.5% in the Northeast, but down just 25.4% in the South. The Midwest (-45.8%) and the West (-39.7%) fall in between.

As a result, the already small Northeast region has fallen to the point of being almost insignificant, accounting for only 5.4% of all new home sales. The South, on the other hand, accounted for 60.2% of sales. Keep in mind that the decline in new home sales has been going on for much longer than a year, so we are off 34.0% from an already low base a year ago.

This is the fourth straight April where new home sales have been sharply lower than the year-ago levels. The graph below (from http://www.calculatedriskblog.com/) is based on the not-seasonally-adjusted numbers, but tells the story nicely. It also points out that this year the traditional “spring selling season” has been a bit of a flop, despite record-low mortgage rates.


 

The best news in the report is the drop in inventories, which are down to 297,000, a drop of 4.2% from last month and down 35.4% from a year ago. This drove the months of supply down to 10.1 months from its peak of 12.4 months in January and 10.6 months in March. As the second graph (also from http://www.calculatedriskblog.com/) shows, this is encouraging, but not quite cause for celebration.

In this downturn we have seen the months of supply metric fall before, only to rise to new highs -- and the level is still far above normal. During the housing-bubble years, four months was the norm, but over the longer term it appears that six months supply would be a fairly healthy market.  We are a long way from that point.

 

With interest rates backing up sharply, it appears that the bulk of the work to bring the months of supply back to more normal levels will have to come from further reductions in new housing starts. This is bad news for the homebuilders like D.R. Horton (DHI - Analyst Report) and Lennar (LEN - Snapshot Report) as well as for the suppliers to the homebuilders, including lumber companies like Weyerhaeuser (WY - Snapshot Report) and roofing and insulation suppliers like Owens Corning (OC - Snapshot Report).

Overall however, we have seen worse new housing reports -- "flat" is better than "flattened." Stabilizing at a very low level is better than continuing to plunge. However, I do not see a real recovery in the cards anytime soon.