New Home Sales Plunge

We got some very bad news today on the Housing front. New Home Sales fell to a seasonally adjusted annual rate of 309,000 from 348,000 in December. That is a drop of 11.2%.

The only real silver lining is that the December number was revised upwards from 342,000. The rate was even 6.1% below the extraordinarily depressed level of a year ago when New Home Sales were running at an annual rate of 329,000.

How low was it? The lowest of all time, or at least as far back as records are kept (1963). Keep in mind that the U.S. population is far larger now than it was in 1963, growing at about 1% per year. More people should mean more need for places for people to live.

Even worse, for the first time in more than a year, we saw a slight increase in the inventory of available homes for sale, rising from 233,000 to 234,000. A year ago there were 340,000 new homes on the market.

That, combined with the lower sales rate, pushed the months of supply metric up to 9.1 months, from 8.0 months in December, although it is well below the 12.4 month level of a year ago (an all-time record). The months of supply bottomed in October at 7.3 months. That was getting within spitting distance of a normal healthy market, which is about 6 months supply. During the housing bubble the months of supply generally hovered around 4 months, and I don’t think we will see those sorts of levels again anytime soon, perhaps for decades.

This month’s sales level was also far below the consensus estimate of a 354,000 annual rate. The first chart below (from http://www.calculatedriskblog.com/) shows the history of the months of supply metric.

The second chart below (from http://www.calculatedriskblog.com/) shows the history of housing starts. Take a close look at the relationship between New Home Sales and the blue recession bars. With the exception of the 2001 downturn, sales fall sharply just before we enter a recession, and then tend to bottom just as the recession ends or a little before the end.

They then rise sharply in the early stages of economic recoveries. As they do, they become one of the principal locomotives driving the economy out of recession. If new homes are not selling, then any new houses that are produced simply sit in inventory. Home builders cannot afford to sit on that inventory very long, and have to cut back on production.

Each new house build generates an enormous amount of economic activity. Think of the number of carpenters, plumbers and electricians that are employed in the building of a house. Then think of the amount of lumber, wall board and cement that goes into building a new house. Furthermore, most of the materials used tend to be domestically produced rather than imported (or, if imported, tend to come from Canada).

The decline in sales is extremely bad news not just for Homebuilders like D.R. Horton (DHI: 12.35 0.00 0.00%), but for a wide range of firms big and small. Firms like USG (USG: 13.20 0.00 0.00%) which make wallboard are going to suffer, as will Fortune Brands (FO: 43.60 0.00 0.00%) with its plumbing and Cabinetry operations. Even giants like United Technologies (UTX: 68.67 0.00 0.00%) will feel the pinch in their heating and air conditioning divisions.

Of course, building fewer houses also means fewer construction jobs, so the progress on the unemployment front is going to be even slower than we thought, which has bearish implications for retailers, especially the hardware stores like Home Depot (HD: 31.36 0.00 0.00%) and Lowe’s (LOW: 23.82 0.00 0.00%), which get hit with the double whammy of fewer sales of tools and materials, directly from the slowdown, as well as the fact that the unemployed have less income to spend.

Regionally, the Northeast was by far the hardest hit, with sales plunging 35.1% below the December rate and 20.0% lower than a year ago. The Northeast, though, is a very small part of the overall New Home Sales picture, and represented just 7.8% of all new home sales in January, down from 16.1% a year ago.

The West saw sales fall 11.9% from December but they were up 13.8% from very depressed levels a year ago. The Midwest was the only region to see a gain for the month with sales rising 2.1%, but they are down 7.5% from a year ago.

The South, which is by far the most important region when it comes to housing data, saw a 9.5% decline on the month and is off 10.5% from a year ago. In January, the South accounted for 52.4% of all home sales.

This was a downright dismal report, especially when you consider that mortgage rates are at near-record-low levels (thanks to the Fed buying program), and we have a big first-time homebuyer tax credit in place.

We got another bit of bad news on the housing front as well, as mortgage applications for purchase (as opposed to re-fis) dropped by 7.3% in the last week to their lowest level since May 1997. That probably means that Existing Home Sales, to be released later this week, will be disappointing as well, although the weak mortgage applications will probably have a bigger impact on the February or March existing home sales figures.

However, Existing Home Sales, even though many times larger than New Home Sales, have a much smaller impact on the economy. The final graph (also from http://www.calculatedriskblog.com/) shows the mortgage application history. The week to week numbers can be very noisy, so it is better to focus on the 4-week moving average.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.