Don't Sweat Softer New Home Sales

New Home Sales were reported lower in June, but I suggest you not read too much into the report. Sales were expected to be slow, and the new home market is seen lagging broader recovery. That said, there was also plenty of good news for those willing to read the report or Wall Street Greek.

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Don't Sweat Softer New Home Sales

New Home Sales ran at an annual rate of 312K in June, down just slightly from May’s revised rate of 315K. Economists surveyed by Bloomberg had been forecasting for a sales pace between 309K and 342K, with the consensus sitting at 321K. Thus, the report was relatively disappointing, but the data effectively shows no change in activity nonetheless. While that was also less than enthusing, it was expected, as the new home market is especially burdened by the heavy inventory of distressed properties on the market and held by banks in so-called shadow inventory.

Distressed property inventory has driven down home prices generally, and put a good number of relatively new properties for sale below replacement cost or the price of a new home. Given the prudent management of most large better-capitalized builders and the capital-strapped positions of the smaller ones; and most importantly a generally light demand for housing in an uncertain economic environment, new home sales are not going to lead the real estate recovery. However, just as I’ve recently written, housing is on the road to recovery in a broader sense.

A closer inspection of the data shows June sales softness in the Northeast (-16%) and West (-13%) was partly offset by strength in the Midwest (+9.5%) and South (+3.4%). Good news was also seen in housing inventory, which showed that despite the slower pace of sales, new home inventory fell to 6.3 months from 6.4 months supply in May. The number of homes for sale continues to ease, which is a necessary pain to find solid support for the next growth market for new homes. At this level of activity, when new home demand revives, it should be akin to a big blue fish taking a hook - there’s no doubt about it when it happens.

More good news was found in the home price data. The median price of a new home increased 5.8% in June, to 235,200. The average price of a new home increased 1.8% to 269K. And while the quick-to-print popular press and investors are crying over S&P Case Shiller data for May that shows year-over-year price decline, they’re missing year-over-year price increase seen in June via this report. It’s pretty substantial too, with the median price of a home up 7.2% on a year-to-year basis.

So in conclusion, I suggest readers and real estate players not lose any sleep over June’s New Home Sales Slippage. All your nightmares should be about our Congress’ potential failure to raise the debt ceiling before a major rating agency downgrades American credit. I even continue to favor homebuilder shares for long-term investment, as when recovery is clearly seen, the stocks should outperform the broader market. However, I must continue to qualify these recommendations and forecasts on the passage of debt ceiling legislation and the maintenance of the AAA rating for the United States. A scenario that includes a failure to do so is one wildly different than most living Americans can ponder in my view.

Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

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