New Home Sales in March rose by 11.1% from March, to a rate of 300,000. Relative to a year ago, sales are down 21.9%. While the rebound is more than welcome, it is still a very dismal rate of new home sales.
In additional good news about the direction of new home sales, the February sales levels were revised up to an annual rate of 270,000 from 250,000. That is still the worst month on record, but not by as big a margin. Thus, relative to where we thought we were, it could be seen as a 20.0% increase.
The March level was substantially better than the expected rate of 280,000. The eleven lowest months on record (back to 1963) for new home sales have all been in the last eleven months. We are down sharply 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 (July ’05, 1.389 million) new home sales are down 78.4%. 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 home builders have no reason to build more of them. After all, that is very expensive inventory to sit on.
Vital for Economic Growth
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 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.
Months of Supply
Inventories of new homes were down 1.1% on the month and are down 19.7% from a year ago. The months of supply is at 7.3 months, down from 8.0 months in February, but up from 7.1 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 a new home, and last week we found out that the months of supply for used homes was 8.4 months, down from 8.5 months in February (see “Used Home Sales Better Than Expected“). 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, 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. Note that inventories have declined at all three levels, not started, is basically improved lots. 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, things were very mixed. In the Northeast, new home sales rose a stunning 66.7% from February but are down 9.1% year over year. The Northeast is the smallest of the four regions, and low absolute levels can make for big percentage changes. Sales there dropped very sharply in February, so don’t read too much into the sharp increase this month.
The South is the biggest and therefore most important of the Census regions when it comes to housing data. It was the only one of the four regions to post a decline, with sales falling 0.6% for the month and down 21.4% year over year. Sales in the Midwest were up 12.9% from February, and are down 34.0% from a year ago. Out West, sales were up 25.9% for the month and were off 20.7% year over year.
Still Not a Pretty Picture
While this report was better than expected, and we also enjoyed a sharp upward revision to last month, it was still an ugly report. The absolute level continues to be dismal. The price indicators were mixed. While the median price of a new home rose 2.9% on the month, the average price fell 3.8%.
Relative to a year ago, the median (always lower than the average) is down 4.9% to $213,800, while the average price is down 6.1% to $246,800. Those declines are a little bit more than we have been seeing from the other housing price indicators, but not out of the ballpark.
A small starter house being sold represents less economic activity than a McMansion being sold. With the prices of used houses falling again, 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. We had a bit of a glimmer of hope in the fourth quarter, as it simply stopped being a drag, and that was a big part of the reason that the fourth quarter was better than the third quarter. 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, but clearly not yet.
With new home sales averaging 294,000 in the first quarter, down from an average of 300,000 in the fourth quarter, it looks like residential investment might well be a small drag on GDP growth in the first quarter.
Historically, on a non-seasonally adjusted basis, March is the strongest month of the year as is shown in the next graph (also from http://www.calculatedriskblog.com). The absolute level of 29,000 new homes actually sold in the month of March is not a very promising start to the spring selling season.
Rate 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 spring, and it may take longer than that, but eventually they will sprout.
Recently job creation has picked up a bit, particularly in the private sector, and we have seen some of the excess housing units being absorbed and the vacancy rate start to fall. However, this has mostly been in the rental apartment market. That is a hopeful sign that very low levels of additions to the housing stock are starting to have an effect.
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 doubling of the new home sales rate from current levels wouldn’t 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.