New home sales in December rose by 17.5% from November, but only to a dismal rate of 329,000. Relative to a year ago, sales are down 7.6%.
While the level was substantially better than the expected rate of 300,000, it is still a very bad level. The eight lowest months on record (back to 1963) for new home sales have all been in the last eight months.
The monthly increase at first glance looks pretty good, but it comes after the November numbers were revised down by 10,000, so even there the increase could be seen as only 13.4%. We are still down from a year ago, and it is not like a year ago was a great time in the homebuilding industry, either.
Relative to the peak of the housing bubble (7/05) new home sales are down 76.3%. The very low May sales rate (282,000) was due to the end of the homebuyer tax credit. New home sales are recorded when the contract is signed, not at closing, as is the case with used home sales. Thus the post-tax-credit hangover came in May for new home sales, not July as was the case for existing home sales.
That effect should have long ago worn off, so you can not attribute the weakness to the temporary distorting effect of the tax credit. The graph below shows the history of new homes sales (blue, left scale) along with the growth in population (red, right scale), since presumably if you have more people, you will need more places for them to live.
Home Sales & Recessions
Take a very close look at the relationship between new home sales and the grey recession bars. New home sales fall sharply before all recessions (with the exception of the dot.com bust caused recession of 2001) and then start to increase sharply in the middle of, or towards the end of, the recession. That clearly is not happening this time around.
If you want to know why the recovery has been anemic so far, look no further than the graph above! New home sales are vital to the overall economy. If new homes are not selling, then homebuilders have no reason to build more of them. After all, that is very expensive inventory to sit on.
Each new home built creates a huge amount of economic activity. Not only are low new home sales bad for the big homebuilders like D.R. Horton (DHI), but also for all the companies that make the products and supplies that go into making a new house. They range from Berkshire Hathaway (BRK.B) for bricks, roofing materials, and insulation to Fortune Brands (FO) for plumbing fixtures and cabinets to USG (USG) for wallboard to PPG Industries (PPG) for glass and paint to International Paper (IP) for lumber.
In terms of employment, it is not just all the roofers and framers that lose jobs due to weak new home sales, but employees at all the firms that make the stuff that goes into making a new home. Of course, if those employees are out of work, they are not spending on other goods and services, dragging down a host of seemingly unrelated businesses.
Not that the direct impact of construction jobs should be underestimated. Since the recession started, one out of every four jobs lost has come from the construction industry.
Inventories of new homes declined by 2.6% on the month and are down 17.7% from a year ago. That puts the months of supply at 6.9 months, down from 8.4 months in July, and from 7.8 months a year ago. While that is well off the peak of 12.0 months it is still above normal. A healthy market has about a six-month supply of new houses and during the bubble, four months was the norm, as is shown in the graph below (from http://www.calculatedriskblog.com/).
Of course, used homes are very good substitutes for new homes, and last week we found out that the months of supply for used homes was 8.1 months (see "Existing Home Sales Rise"). While that is a major improvement from where we were last summer, it still suggests downward pressure on existing home prices (and more foreclosure problems), which will continue to make life tough for the housing industry.
Still, the absolute level of new home inventories is near a record low, and the relatively high months supply is entirely due to the low sales rate. Eventually population growth and a higher rate (more normal) of household formation will absorb the excess inventory.
Given the extremely low levels of new home starts, one does not have to imagine very high absolute levels to generate some very fancy looking percentage increases. The third graph, also from http://www.calculatedriskblog.com/), tracks the history of new home inventories.
Results by Region
Regionally, things were all over the map, with all the strength concentrated in one region, the West. Out West, new home sales rose a stunning 71.9% from November and are up 32.5% year over year. Let's hope that California really is where things happen first and then spreads to the rest of the country.
The South is the biggest and therefore most important of the Census regions when it comes to housing data. It posted a 1.8% rise on the month, but is down 8.7% year over year. Sales in the Midwest were up 3.2% from November and are down 37.3% from a year ago. In the Northeast, sales were down 5.0% for the month. Year over year they are down a stunning 50.0%. It is possible that the bad weather in December might have played a role in depressing sales in the Northeast in the month.
A Very Mixed Report
Overall, this was a very mixed report. The sales pace was much higher than expected, and the level of inventories continues to trend down. However, November was revised down fairly significantly, and the absolute level of sales is still extremely low. The fact that the strength was so regionally concentrated does not instill very much confidence either.
On the other hand, if we can start to string together several months of these sort of month-to-month gains, then we can feel confident that the overall economic recovery is on a sounder footing.
The main problem right now for housing demand is the very low rate of household formation. Instead of moving out to get their own place, people in their 20's are being forced to live with Mom and Dad, since they don't have a job that will pay the rent or support a mortgage. Since residential investment is such an important swing factor in creating jobs in the country (both directly and indirectly) that sets up a huge "chicken and the egg" problem.
We are not in a robust recovery yet, but the seeds have been planted. It is unlikely that they will germinate before next spring, and it may be later than that, but eventually they will sprout.
D R HORTON INC (DHI): Free Stock Analysis Report
FORTUNE BRANDS (FO): Free Stock Analysis Report
PPG INDS INC (PPG): Free Stock Analysis Report
USG CORP (USG): Free Stock Analysis Report
Zacks Investment Research
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The monthly increase at first glance looks pretty good, but it comes after the November numbers were revised down by 10,000, so even there the increase could be seen as only 13.4%. We are still down from a year ago, and it is not like a year ago was a great time in the homebuilding industry, either.
Relative to the peak of the housing bubble (7/05) new home sales are down 76.3%. The very low May sales rate (282,000) was due to the end of the homebuyer tax credit. New home sales are recorded when the contract is signed, not at closing, as is the case with used home sales. Thus the post-tax-credit hangover came in May for new home sales, not July as was the case for existing home sales.
That effect should have long ago worn off, so you can not attribute the weakness to the temporary distorting effect of the tax credit. The graph below shows the history of new homes sales (blue, left scale) along with the growth in population (red, right scale), since presumably if you have more people, you will need more places for them to live.
Home Sales & Recessions
Take a very close look at the relationship between new home sales and the grey recession bars. New home sales fall sharply before all recessions (with the exception of the dot.com bust caused recession of 2001) and then start to increase sharply in the middle of, or towards the end of, the recession. That clearly is not happening this time around.
If you want to know why the recovery has been anemic so far, look no further than the graph above! New home sales are vital to the overall economy. If new homes are not selling, then homebuilders have no reason to build more of them. After all, that is very expensive inventory to sit on.
Each new home built creates a huge amount of economic activity. Not only are low new home sales bad for the big homebuilders like D.R. Horton (DHI), but also for all the companies that make the products and supplies that go into making a new house. They range from Berkshire Hathaway (BRK.B) for bricks, roofing materials, and insulation to Fortune Brands (FO) for plumbing fixtures and cabinets to USG (USG) for wallboard to PPG Industries (PPG) for glass and paint to International Paper (IP) for lumber.
In terms of employment, it is not just all the roofers and framers that lose jobs due to weak new home sales, but employees at all the firms that make the stuff that goes into making a new home. Of course, if those employees are out of work, they are not spending on other goods and services, dragging down a host of seemingly unrelated businesses.
Not that the direct impact of construction jobs should be underestimated. Since the recession started, one out of every four jobs lost has come from the construction industry.
Inventories of new homes declined by 2.6% on the month and are down 17.7% from a year ago. That puts the months of supply at 6.9 months, down from 8.4 months in July, and from 7.8 months a year ago. While that is well off the peak of 12.0 months it is still above normal. A healthy market has about a six-month supply of new houses and during the bubble, four months was the norm, as is shown in the graph below (from http://www.calculatedriskblog.com/).
Of course, used homes are very good substitutes for new homes, and last week we found out that the months of supply for used homes was 8.1 months (see "Existing Home Sales Rise"). While that is a major improvement from where we were last summer, it still suggests downward pressure on existing home prices (and more foreclosure problems), which will continue to make life tough for the housing industry.
Still, the absolute level of new home inventories is near a record low, and the relatively high months supply is entirely due to the low sales rate. Eventually population growth and a higher rate (more normal) of household formation will absorb the excess inventory.
Given the extremely low levels of new home starts, one does not have to imagine very high absolute levels to generate some very fancy looking percentage increases. The third graph, also from http://www.calculatedriskblog.com/), tracks the history of new home inventories.
Results by Region
Regionally, things were all over the map, with all the strength concentrated in one region, the West. Out West, new home sales rose a stunning 71.9% from November and are up 32.5% year over year. Let's hope that California really is where things happen first and then spreads to the rest of the country.
The South is the biggest and therefore most important of the Census regions when it comes to housing data. It posted a 1.8% rise on the month, but is down 8.7% year over year. Sales in the Midwest were up 3.2% from November and are down 37.3% from a year ago. In the Northeast, sales were down 5.0% for the month. Year over year they are down a stunning 50.0%. It is possible that the bad weather in December might have played a role in depressing sales in the Northeast in the month.
A Very Mixed Report
Overall, this was a very mixed report. The sales pace was much higher than expected, and the level of inventories continues to trend down. However, November was revised down fairly significantly, and the absolute level of sales is still extremely low. The fact that the strength was so regionally concentrated does not instill very much confidence either.
On the other hand, if we can start to string together several months of these sort of month-to-month gains, then we can feel confident that the overall economic recovery is on a sounder footing.
The main problem right now for housing demand is the very low rate of household formation. Instead of moving out to get their own place, people in their 20's are being forced to live with Mom and Dad, since they don't have a job that will pay the rent or support a mortgage. Since residential investment is such an important swing factor in creating jobs in the country (both directly and indirectly) that sets up a huge "chicken and the egg" problem.
We are not in a robust recovery yet, but the seeds have been planted. It is unlikely that they will germinate before next spring, and it may be later than that, but eventually they will sprout.
D R HORTON INC (DHI): Free Stock Analysis Report
FORTUNE BRANDS (FO): Free Stock Analysis Report
PPG INDS INC (PPG): Free Stock Analysis Report
USG CORP (USG): Free Stock Analysis Report
Zacks Investment Research
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