Monday, July 27, 2009

New Home Sales Up 11 Percent; Don't Celebrate Too Long

The Commerce Department this morning announced that sales of new, single family homes for the month of June increased by 11 percent (month to month). Because analysts were expecting a bump of only 2.3%, the news fueled the view - shared by many misunderstood individuals - that the housing market has bottomed, and may even have begun it's first "leg" of recovery. In evaluating this claim, it would be prudent to highlight several facts pertaining to the residential housing market, notably:
  • Although the month-to-month comparison is positive 11%, the level of new home sales in June 2009 was 21.3% lower than in June 2008.
  • At the current level of new home sales and new home starts, the supply of housing will return to a level of around 6 months worth (considered healthy) of inventory in early 2010. This is good news, however, Housing Starts are the wild card; this data point is heralded as a sign of recovery, yet too many new starts will simply contribute to the backlog of inventory.
  • Those "sales" that were logged in June were facilitated by the record low mortgage rates of the April/May time period. There has been some volatility in the average mortgage rate since then - owing to volatile Treasury market conditions - but the overall trend has been towards slightly higher rates.
  • The first-time-home buyer-tax credit (a.k.a that 8 grand cash injection) has been cited as an explanation for the uptick in new home sales. Needless to say, the tax credit does not apply to homes purchased after December 1,2009, prompting speculation as to whether the recent uptick in new home sales is even sustainable.
Finally, we would note that new home sales only represent 15% of the US residential market; the other 85% is comprised of existing homes. When you apply a little bit of logic to the situation, it makes perfect sense that new sales would begin ticking back prior to existing sales. The reason: new homes are sold by businesses, and existing homes are sold by individuals. In an inefficient market such as real estate, the price of an individuals home is largely determined by:
  1. What he/she thinks the house is worth
  2. How bad he/she needs to sell the house
Homeowners are notoriously optimistic concerning the value they attribute to their own residence. Buyers, as it turns out, are not so optimistic. The result is a massive bid/ask spread that exists for any piece of real estate listed on an MLS; with the length of time it takes to sell the asset largely a function of the size of the spread.

New home sales in contrast, are for the most part transactions conducted between a builder and client/customer. The builder has more resources, and is likely more aware of the proper ask price than the individual seller. Additionally, the publicly traded builder can reap a tax benefit by offloading inventory at a price below his basis.

We aren't perma bears by any means; however, evidence of a more sustained and substantive nature is required before we will throw our hat into the "residential recovery" ring. Sphere: Related Content

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