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A Flat February for New Homes

After a surprising 5% drop in January (see BW Online, 2/27/06, "Getting a Bead on the Housing Market") sales of newly constructed homes are expected to remain flat in February. We at Action Economics expects the February new home sales report, scheduled for release Mar. 24, to be unchanged at at a 1.233 million unit annual pace.

Our projection is a bit above the median forecast of economists of a 1.2 million-unit pace. The forecast is supported by ongoing strength in construction employment and housing permits and starts, but weakness in the survey from the National Assn. of Home Builders survey, weakness in pending home sales, and the steady downtrend in the MBA purchase index.

READY FOR REBOUND. We will also receive some directional clues from the existing home sales report, set for release Mar. 21. Our forecast for February existing home sales calls for a rebound of 1.4% to a 6.65 million unit annual rate (the median forecast is for 6.50 million) following the weaker-than-expected 6.56 million rate in January.

Weakness in the weekly MBA (Mortgage Bankers Association) purchase index in February and March caps the upside risk on the month. While the change in the month-average MBA purchase index has only a loose relationship with the month-to-month swings in existing homes sales, the levels of both measures do tend to track each other well. The average February level of the MBA purchase index is consistent with new home sales near 1.2 million units.

MORE UNSOLD HOMES. Inventories of unsold homes and price data will continue to be a focus. Inventories increased another 2.5% in January to another new record of 528,000 units. The gain left inventories up 21.5% year-over-year and months-supply at 5.2 months from 4.8 months. This marks the highest level of months' supply of unsold homes since October, 1996.

Meanwhile, the median price data rose 4% on the month, and the average price rose 3.5%. This left the median price up 6.7% year-over-year following the usual upward back-revisions, and the average price up 3% year-over-year.

Strong home price appreciation in recent years has boosted household balance sheets despite rising debt levels, leaving the same impressive growth rates for net worth as seen during the 1990s. Given the importance of housing for the economy, price trends will continue to play an important role in driving household net worth.

EXPECT INCONSISTENCIES. How could financial markets respond to the Mar. 24 report? Treasuries typically do not show much reaction to the new home sales data, as the series has little impact on most other economic forecasts. But the market has focused on housing data over the last few months, given mounting concerns of a slowdown in this bellwether sector. As such, the monthly new home sales report will be of increased importance for the market over the coming months. The dollar is not expected to show much reaction to the report, although housing data have become more of a focus for the foreign exchange market in recent months as well.

Overall, the housing data remain choppy, and are consistent with expectations of a gradual moderation in growth for the sector nationwide through 2006. One important thing to watch, however, will be public perceptions of the health of the sector. With anecdotal reports of jitters in last year's hot regional housing markets, Wall Street -- and Main Street -- will be watchful as we enter the important spring home-buying season.

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