Interest Rate Roundup

Wednesday, April 25, 2007

New home sales disappoint, but signals more mixed

New home sales were just released. Here's my take on the numbers and what they mean ...

* Overall sales rose, but by a smaller margin than expected. The seasonally adjusted annual rate of sales climbed 2.6% to 858,000 in March from 836,000 in February. That compares with a forecast gain of 5% among economists polled by Bloomberg. Sales were down 23.5% year-over-year.

* We did get some good news on home prices. The median price of a new home rose to $254,000 in March, up 6.4% from a year ago.

* On the inventory front, there were 545,000 homes for sale in March -- up ever-so-slightly from 544,000 a month earlier. However, supply dipped 1.4% from a year ago, while the “months supply at current sales pace” indicator fell to 7.8 last month from the 16-year high of 8.1 in February.

Overall, this new home sales report looks better than yesterday’s existing home report. But there are signs weather played a big role in boosting the sales figures. One example: New home sales reportedly exploded by 50% in the Northeast region between February and March. In less weather-sensitive regions, sales were down slightly (-2.7% in the South and -0.9% in the West). By contrast, the existing home sales report showed declines in all four geographic regions (a sign that more than just bad February weather was behind the weakness in March existing home closings).

Somewhat surprising is the greater-than-6% year-over-year gain in median home prices. That’s the biggest rise since June 2006. Actual on-the-ground observations continue to show that builders are using lots of incentives and base price cuts to move inventory. So it’s tough to say whether these figures truly reflect what buyers are paying. But on its face, it’s a strong number.

As for inventories, they remain much higher than normal – Supply typically ranged from about 260,000 to 380,000 units during the 1980s and 1990s versus 545,000 now. Builders are cutting back sharply on home construction, with housing starts down about 23% YOY in March. But it will take even-deeper construction cuts, lower prices, and more incentives to get supply more closely aligned with the reduced level of demand. I’m not expecting a lasting recovery until sometime later in 2008.


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