New Home Sales in July fell 0.7% from June, to a rate of 298,000. Relative to a year ago, sales are up 6.8%. While the year-over-year rebound is more than welcome, it is still a very dismal rate of New Home sales.
Also, there was a downward revision to the June numbers of 12,000 to 300,000. Thus, relative to where we thought we were, it could be seen as a 4.5% decrease. The July level was worse than the expected rate of 310,000.
The 15 lowest months on record (back to 1963) for new home sales have all been in the last 15 months. New home sales have only exceeded the 400,000 level three times since September of 2008 when the financial markets collapsed. The most recent time was in April 2010, as sales were inflated by the rush to get in under the wire and collect the homebuyer tax credit. Sales collapsed after that, and July comp is thus an easy one.
Relative to the peak of the housing bubble (7/05, 1.389 million), new home sales are down 78.5%. Prior to September 2008, there had only been 20 months in which new home sales were below the 400,000 level, with the most recent being in 1982. 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.
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.
Unlike used home sales, 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.
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, almost 30% jobs lost have come from the construction industry.
New Home Inventories
Inventories of new homes were down 0.6% on the month and are down 21.4% from a year ago. The months of supply is at 6.6 months — unchanged from June, but down from 9.0 months a year ago. That is well off the peak of 12.1 months, and is now just slightly above normal. A healthy market has about a 6 month supply of new houses and during the bubble, 4 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 a new home, and last week we found out that the months of supply for used homes was 9.4 months, up from 9.2 months in June suggests downward pressure on existing home prices (and more foreclosure problems), which will continue to make life tough for the housing industry.
The absolute level of new home inventories is at a record low; near normal months supply is entirely due to the low sales rate. Inventories of new homes have now fallen for (at least) 30 straight months. 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. Note that inventories have declined at all three levels. The biggest decline has come in homes under construction. The decline in the absolute level of inventories is good news, but is swamped by the still very high level of inventories of used homes.
Results by Region
Regionally, the numbers were very mixed. The numbers in the Northeast were very strong, with sales doubling on the month but down 3.4% from a year ago. The Northeast is, however, by far the smallest of the four regions and low absolute numbers can make for some pretty big percentage changes. The absolute number was just 28,000, up from 14,000 last month. In June it accounted for just 9.3% of all new homes sold, up from 4.7% in June.
Relative to last month, sales in the Midwest were up 2.4%, but they were unchanged from a year ago. In the West, sales were down by 5.9% from last month but up 45.5% from last year. The South, by far the largest of the four regions (54.7% of total in July) saw a drop of 7.4% for the month and unchanged from last year.
Worse Than Expected
This report was worse than expected, and we got a downward revision to last month. The absolute level continues to be dismal. In other words, it was an ugly report.
With the prices of used houses weak, it makes selling a new home that much tougher. After all, a used home is a very good substitute for a new home. The housing sector has been a major drag on the economy for several years now. As Residential Investment is now a very small part of the overall economy (and new home construction is the largest part of, but not all of it), further drops in new home construction will not hurt the economy much going forward, but it sure would be nice to see it on the positive side of the ledger. That will happen eventually.
Historically, on a non-seasonally adjusted basis, July is a slightly weaker month than June for new home sales. The history of raw, unadjusted sales is shown in the next graph (also from http://www.calculatedriskblog.com/). Note the sharp decline from April to May last year, due to the tax credit effect, which is not in place this year.
Lack of "Household Formation"
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 this summer, and it may take longer than that, but eventually they will sprout.
The lack of a housing recovery is the key difference between this recovery and every other one which has preceded it. The collapse of the housing sector is directly responsible for a quarter of the jobs lost, and indirectly responsible for many more than that. The loss of jobs has in turn depressed household formation, and thus further depressed the housing market.
Even extremely low mortgage rates have not been enough to get things going again. We still have extremely high vacancy rates, both of apartments and of houses sitting empty, although lately we have seen some improvement in the rental market.
Until that excess is absorbed, it is unlikely that we will get anything like a robust housing sector, although even a tripling of the new home sales rate from current levels would bring us to what was considered a normal rate of sales back in the 1970’s and 1980’s. Back then we had far fewer people, and thus a lower need for places for people to live. Like a kidney stone, this too shall pass.
New home sales are awful, have been awful for some time now and show few signs of getting better anytime soon. This is going to be an ongoing drag on the economy for awhile yet. When the housing market — particularly the new home market — comes to life, it will be the spark that can ignite a strong self-sustaining recovery, but it does not seem likely to happen anytime soon.
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