New Home Sales Indicate Stability, Not Recovery

• The new home sales numbers seem to confirm what the single-family housing starts and permits numbers imply that the market for new single-family homes is flattening.
• Indeed, that it may have hit bottom in January and that the recovery will be a slow one.
• Despite improving numbers, we are not ready to say that the market has hit bottom.
• These numbers are estimates with large standard deviations. Because the margin of errors is big, the footnote in the press release warns, “It takes four months to establish a trend for new homes sold.”
• We still project that this market will start expanding in the second half of this year.
• As opposed to the resale volumes, which increased by 2.9% month-to-months; in April new homes, sales remain sluggish.
• Plunging prices, record-low mortgage rates and an $8000 tax credit for first time buyers did not help much to push up hew housing demand.
• We believe, new home sales is probably a better reflection of the underlying demand than the existing home sales which have been highly boosted by the increasing foreclosure numbers recently.
• Nevertheless, new home inventories kept declining in April which sent the months’ supply in new homes to 2.3 month below a record of 12.4 months reached in January.
• In addition, the home prices kept falling and were 14.9% below last April’s levels. Even though we see builders are becoming more optimistic about the future of the housing industry and there is some stabilization in housing demand, surging foreclosures, rising mortgage rates and high unemployment rates will weigh heavily on new home sales and will prevent a sharp rebound in the housing market in the near future.
• New homes are now sitting on the market for a median 10.9 months before selling, and completed homes still comprise an extraordinarily high share of total homes for sale.
• While sales have stabilized within a fairly narrow range over recent months, there is little to suggest that the sales rate will post a meaningful and sustained increase any time soon.
• Despite the Fed’s efforts, mortgage rates are heading higher, while the ongoing erosion in the labour market and tougher mortgage lending standards will continue to act as drags on sales.
• It is true that the first-time buyer tax credit is stimulating sales, but this will not be sufficient to sustain a meaningful increase in new home sales.
• Even with some normalization of unsold inventory of newly constructed homes, it’s unlikely that the real estate market can support any significant pick-up in homebuilding activity in the foreseeable future.
• That’s because foreclosure activity is still increasing and these properties are flooding the market.
• The report was a bit of a mixed bag, as the weaker than expected gains in new home sales will likely be offset by the improvement in the inventory data.
• This is a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months.
• The relatively late Easter might have restrained activity, we suppose, but we cannot be sure. Either way, we still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months.
• Looking ahead, reports from homebuilders indicate that activity picked up in April and then a bit further in May, led by first-time homebuyers attracted by steep price declines at the bottom end of the market.
• The same appears to be true of existing homes, where first-timers are being tempted by deeply discounted properties coming out of foreclosure.
• Therefore, while sales rates may well have bottomed, it seems clear that gains in activity will remain concentrated in lower priced homes.
• However, supply will remain enormous, particularly with increased competition coming from distressed sales of existing homes.
• This suggests that prices will continue to edge lower at the bottom end of the market even as demand for these homes picks up a bit.
• Although new single-family sales were a little below expectations in April, we judge the data to be consistent with a bottoming out in new housing construction activity as also suggested by single-family housing starts and permits and the NAHB’s housing market index.
• Perhaps the most constructive indicator is the decline in the number of homes for sale in April, both in absolute terms and in relation to sales (though the months’ supply remains elevated).
• The latest mortgage delinquency data for the first quarter remind us that there are still very significant problems in the housing market.