New Home Sales Sink , but Look Closer

By Markos N. Kaminis - Economy & Markets:

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Every once in a while we blogging fools can't quite find the right word to describe a situation. This was not the case this morning however, when the Census Bureau and HUD released the New Home Sales data for December. Still, we urge you to read on, because the situation is more complicated than it seems. This latest report paints a dire environment indeed, but of an isolated segment of the housing market.

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Yowsers!

The annual pace of new home sales sank to a new record low in December. Running at 331K, the sales pace was 15% below November's revised rate. In fact, sales have not been this low ever before, at least not since 1963, when record keepers began keeping count. Bloomberg's consensus of economists were knocked off their feet by the news, as the forecasters were looking for a pace of 400K... and they probably considered that a bad number! Last month's sales were 44.8% below the 600K pace set in December of 2007.

As new home demand disappears, pricing is adjusting rapidly. Prices are now in a death-dive (they're falling anyway), as the median price for homes sold in December reached $206,500, with the average measuring $246,900. Case Shiller's Home Price Index confirmed the trend earlier this week, as it showed prices fell 2.2% in November alone among the 20 metropolitan regions surveyed. We can only speculate on December, but today's news seems to confirm we're in for more of the same.

Most home builder CEOs seemed distraught to us when the pace of sales fell below 500K. They should be on suicide watch now! Last week, the National Association of Home Builders (NAHB) Housing Market Index showed builder sentiment at an all-time low of 8 in January, and down from 9 in December.

At this pace, the inventory of homes available for sale actually increased in December, to 12.9 months. That's NOT good, and most experts have been looking toward a different trend for these metrics. We should also note that December's pace is probably not representative of the norm for the next 12 months; at least we hope so. This change in home inventory is reminiscent to me of a deceptively low P/E ratio that sees a stock continue even lower as the "E" (earnings) portion of the ratio trends downward. To the layman, it's like rejoicing that a flood hasn't destroyed the second floor of your home, while the water is still rising.

Home builder stocks understandably reacted harshly to the news. As of early afternoon trade the stocks were down:

* Toll Brothers (NYSE: TOL) -6.5%
* Pulte Homes (NYSE: PHM) -7.9%
* NVR Inc. (NYSE: NVR) -7.8%
* D.R. Horton (NYSE: DHI) -11.5%
* MDC Holdings (NYSE: MDC) -4.7%
* Lennar Corp. (NYSE: LEN) -8.1%
* Centex Corp. (NYSE: CTX) -8.4%
* KB Home (NYSE: KBH) -7.3%
* Ryland Group (NYSE: RYL) -0.4%
* Hovnanian (NYSE: HOV) -8.4%
* Beazer Homes (NYSE: BZH) -6.3%

Housing Now Suffers from Recession

Over the past few weeks, we've received a plethora of housing data to look over. While the individual reports offered a note of hope here or there, the overwhelming message conveyed was that housing is now suffering NOT from the bubble, but from the recession. Spending is down and lending standards are tight, so the housing recovery is pushed out further.

Existing Home Sales - December

Existing home sales, reported on Monday, was one of those few bright spots. Existing sales represents a much greater portion of the overall market (93.5%). For this reason, the data is more useful toward the accurate diagnosis of market health. However, at the height of the bubble, new home sales represented nearly 20% of total sales. Home builders are in survival mode now though, and so the normal run rate is somewhere in between these two proportions.

Still, Existing Home Sales improved 6.5% in December, to an annual pace of 4.74 million units. Record keepers attributed the improvement to lower home prices. Inventory levels also improved 11.7%, leaving a 9.3 month supply of homes for sale. That compares against November's level of 11.2 months. This is clearly a different picture than that painted by the New Home Sales Report today, and yet another reason to read Wall Street Greek. We make sense of it all for you.


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