A Nasty Surprise on New Home Sales
The February report showed a 3.9% slump, bucking some earlier positive signals in the sector. Harsh winter weather may be the key culprit
Those McMansions aren t moving like they used to. Wall Street was caught by surprise on Mar. 26 with the release of a Commerce Dept. report showing a 3.9% drop in U.S. new home sales in February, to a 0.848 million unit annual pace. And the back data for new home sales since November were revised considerably lower as well. The headline figure was well short of the 1.0 million median forecasts of economists revealed by Action Economics.
The drop was all the more surprising given the positive signals on the housing sector seen earlier in March: the 3.9% pop in February existing home sales, and the surge in the National Association of Home Builders sentiment index from 35 to 39 in February, before dropping back to 36 in March.
The 10 a.m. [Eastern Daylight Saving Time] release had an immediate impact on financial markets, as investors worried that the economy is weakening and that troubles in the subprime mortgage market are sparking tighter credit conditions and slower lending and new housing demand. Major equity indexes slumped, with the Dow industrial losing over 100 points in late morning trading. Shares of beleaguered homebuilders such as KB Home [ticker KBH /ticker], Centex [ticker CTX /ticker], Hovnanian [ticker HOV /ticker], Lennar [ticker LEN /ticker], and Toll Bros. [ticker TOL /ticker] moved lower as the housing sector s recent string of good news came to an end. Treasury prices rose as yields moved lower, while the dollar slipped against other major currencies.
leading One Bright Spot /leading The weak headline figure for February suggests that resold homes from cancellations, which aren t included in the new home tally, are likely depressing the sales figures. Sales of new homes are counted when they re first sold.
If there s a cancellation, the figures are t subtracted from the sales tally, but the second sale of the same home in t counted either. This process leaves the figures accurate on average, but with an exaggerated overshoot in sales at the top and an undershoot in sales at the bottom.
Taking a closer look at the report, the geographic mix of sales reinforced the notion that severe winter weather during February disrupted sales in the Midwest and Northeast, with respective sales declines of 20% and 26.8%. Sales in the South also fell 7.0%, while sales in the West actually surged 24.6%. The levels of sales were particularly depressed in all but the West, while the bounce in the West returned the figure to levels seen in late 2006 before a big January hit.
One bright spot came from the price data in the report. The median price data were all revised upward, rising 2.8% to $250,000 in February, vs. the 0.9% median price bounce from the existing home sales report. But comparisons with the prior-year period aren t as flattering, with median prices posting respective year over year declines of 0.3% for new homes and 1.3% for existing homes. Overall, we still expect year over-year price comparisons to remain subdued over the coming months, as inventory and buyer hesitation continue to put downward pressure on pricing.
The weak February showing for new home sales points to continued softness in the construction sector as well. We continue to expect another 0.8% drop in construction spending in February and a 23% rate of contraction in residential construction in the first-quarter gross domestic product report.
Those McMansions aren t moving like they used to. Wall Street was caught by surprise on Mar. 26 with the release of a Commerce Dept. report showing a 3.9% drop in U.S. new home sales in February, to a 0.848 million unit annual pace. And the back data for new home sales since November were revised considerably lower as well. The headline figure was well short of the 1.0 million median forecasts of economists revealed by Action Economics.
The drop was all the more surprising given the positive signals on the housing sector seen earlier in March: the 3.9% pop in February existing home sales, and the surge in the National Association of Home Builders sentiment index from 35 to 39 in February, before dropping back to 36 in March.
The 10 a.m. [Eastern Daylight Saving Time] release had an immediate impact on financial markets, as investors worried that the economy is weakening and that troubles in the subprime mortgage market are sparking tighter credit conditions and slower lending and new housing demand. Major equity indexes slumped, with the Dow industrial losing over 100 points in late morning trading. Shares of beleaguered homebuilders such as KB Home [ticker KBH /ticker], Centex [ticker CTX /ticker], Hovnanian [ticker HOV /ticker], Lennar [ticker LEN /ticker], and Toll Bros. [ticker TOL /ticker] moved lower as the housing sector s recent string of good news came to an end. Treasury prices rose as yields moved lower, while the dollar slipped against other major currencies.
leading One Bright Spot /leading The weak headline figure for February suggests that resold homes from cancellations, which aren t included in the new home tally, are likely depressing the sales figures. Sales of new homes are counted when they re first sold.
If there s a cancellation, the figures are t subtracted from the sales tally, but the second sale of the same home in t counted either. This process leaves the figures accurate on average, but with an exaggerated overshoot in sales at the top and an undershoot in sales at the bottom.
Taking a closer look at the report, the geographic mix of sales reinforced the notion that severe winter weather during February disrupted sales in the Midwest and Northeast, with respective sales declines of 20% and 26.8%. Sales in the South also fell 7.0%, while sales in the West actually surged 24.6%. The levels of sales were particularly depressed in all but the West, while the bounce in the West returned the figure to levels seen in late 2006 before a big January hit.
One bright spot came from the price data in the report. The median price data were all revised upward, rising 2.8% to $250,000 in February, vs. the 0.9% median price bounce from the existing home sales report. But comparisons with the prior-year period aren t as flattering, with median prices posting respective year over year declines of 0.3% for new homes and 1.3% for existing homes. Overall, we still expect year over-year price comparisons to remain subdued over the coming months, as inventory and buyer hesitation continue to put downward pressure on pricing.
The weak February showing for new home sales points to continued softness in the construction sector as well. We continue to expect another 0.8% drop in construction spending in February and a 23% rate of contraction in residential construction in the first-quarter gross domestic product report.
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