New Home Sales: Very Good News

Raise High the Roofbeam, Carpenter!

More good news on the housing front: new home sales jumped 9.6% in July to a seasonally adjusted annual rate of 433,000. In addition, June sales were revised up from 384,000 to 395,000. The jump in sales brought down inventories to 271,000 from 280,000 in June.

This brought the months supply metric down to 7.5 months, a full month less than in June, and well below the 10.1 months of a year ago, when inventories stood at 419,000. That is a 35.4% year-over-year drop, far exceeding the 13.4% decline in sales from a year ago.

We are now almost down to a normal months supply, which is around six months, although during the boom years it was consistently around four months. Homebuilders like D.R. Horton (DHI - Analyst Report) and Ryland (RYL - Snapshot Report) will be able to pick up the pace of housing starts without the fear that the houses will just sit there and drain cash from them. 
 
The Northeast saw the biggest gain by far, with sales soaring 32.4%, and even up 9.8% from a year ago. Unfortunately, the Northeast is the smallest of the regions when it comes to the housing market, and even with the increase it accounted for just 10.4% of the nationwide market (up from 8.6% in June).

However, the second strongest region was the South, which is by far the largest and most important. There sales were up 16.2% on the month, although they remain 18.4% below a year ago. The South was responsible for 51.3% of all home sales in July.

The West posted only a moderate 1.0% rise and is 14.6% below a year ago. The Midwest was the only region to see a decline, with sales falling 7.6% on the month. On a year-over-year basis, though, it has held up well with only a 4.7% decline.

While volumes were up, prices fell, particularly relative to a year ago. In July, the median price for a new home was $210,100, down from $210,400 in June and $237,300 a year ago. The average (mean) house price declined to $269,200 from $276,900 in June and $301,900 in July 2008.

Some of that is due to the mix of houses being sold. The data on sales by price range is reported in absolute monthly terms, not as seasonally ajdusted annual rates. However, sales of starter homes (less than $200,000) rose to 18,000 in July from 17,000 in both June and a year ago. Move-up homes (more than $200K, less than $500K) were flat with a month ago at 17,000, but were 22.7% below the 22,000 sold a year ago.

Sales of McMansions (over $500,000) were also flat with June at 3000, but off 40% from the 5000 rate of a year ago. Since the data is just persented as thousands, there is a lot of room in them for rounding errors (the 3000 they report could be 2500, or 3499, and the 5000 last year could be 4500 or 5499, so the percent change could actually be anywhere between -54.5% to -22.2%, for example).

Housing, particularly new housing, is the traditional engine for powering the U.S. economy out of a recession. This is true of all post-war recessions, not just this one that was largely caused by housing-related issues. Look at the graph below (from http://www.calculatedriskblog.com/). Notice that new home sales bottom towards the end of a recession and rebound strongly as a recovery gets underway (also note that sales tend to fall sharply before most recessions get underway).

New home sales are closely related to residential investment (it also includes home improvement spending and a few other categories). Given the huge fall we have had over the last three years, residential investment now makes up a relatively small part of GDP. In the second quarter, it was a post war record low of 2.44% of GDP. That was in stark contrast to the 6.26% of GDP it hit in the fourth quarter of 2005.

It is not so much the size of residential investment that makes it so important to the economy, but its volatility. Since 1947, it has averaged 4.76% of the economy, or about double what it was in the second quarter of this year. The standard deviation is 0.79, which means 2/3 of the time it is between 3.91% and 5.55%. That can make the difference between the economy doing well and being in a recession.

It also illustrates just how extreme the housing movements have been. A two standard deviation movement happens only 5% of the time, and in the second quarter we were almost three standard deviations below the average, while at the peak we were almost two standard deviations above. That is almost a five standard deviation move, which is an exceedingly rare event statistically.

A pick-up in housing will help not only the homebuilders, but suppliers like the lumber companies such as Weyerhaeuser (WY - Snapshot Report) and Louisiana Pacific (LPX - Snapshot Report) to tool companies like Black & Decker (BDK - Snapshot Report). It will start to put people back to work and they will be able to start spending. The rise in new home sales is good news -- it is very good news.



With more than 25 years of experience as an analyst and portfolio manager, Dirk van Dijk is Zacks’ Chief Equity Strategist. He also manages the new long-term investing service, Strategic Investor.