New Home Sales: More Signs of Stability

Action Economics expects the January housing figures to show a much smaller decline, consistent with continued steadiness

Is the worst over for the housing market? Many observers—including Federal Reserve Chairman Ben Bernanke in his recent testimony before Congress—have noted indications that the sector is stabilizing after a pronounced slump. We at Action Economics have also seen some encouraging signs (see, 2/23/07, "Housing Remains Steady Amid the Gloom").

The next piece of the data puzzle will be revealed on Feb. 28 with the release of the January new home sales report. We expect sales for the month to come in at a 1.090 million unit annual rate (vs. economists' median forecast of a 1.096 million-unit rate), a 2.7% drop from the unexpectedly firm 1.120 million-unit pace in December. Although our projection is for a decline, the level would be well above the levels seen during the July to October slump, and hence consistent with continued stabilization in the housing market.

The sharp uptrend in the Mortgage Bankers' Assn. purchase data since November limits the downside risk to housing during the month, as does the rising average loan size since that time and the sharp uptrend in NAHB survey readings. The modest improvement projected in existing home sales data also soften the downside risk for new home sales. One caveat: The January housing starts report—which showed a 14.3% plunge to a 1.408 million-unit annual rate that marks the weakest level of starts since August, 1997—highlights the risk that the projected stabilization in housing by mid-year will not be smooth.

Supply Meets Demand

Inventories declined 0.9% in December, leaving a level of 537,000 units and months-supply at 5.9 months, from the 6.1 months, to mark the lowest level of months-supply since January.

A slackened level of building is bringing supply in line with demand. Price data were actually stronger than expected in December, though the median price fell 1.5% year-over-year while the average price was unchanged.

The spring typically represents the huge seasonal ramp-up in activity of new home sales, and hence the monthly data are of growing importance as we approach the March and April reports. Until then, however, the January and February reports are typically highly affected by swings in the weather, and the January reports this year have experienced diverging weather trends, while the February reports will reflect particularly harsh winter weather. Market participants will have to make extra efforts to read the tea leaves in these volatile reports to see what trend is likely as the spring reports emerge.

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