New home sales face myriad of headwinds

New homes sales continue to paint a glum picture for home builders, according to the most recent government data. New home sales held steady in August at a seasonally adjusted annual rate of 288,000, below most forecasts. Sales did remain slightly above the rate of 282,000 in May, the lowest reading since records began in 1963.

Meanwhile, the number of new homes for sale fell from 8.7 months in July to 8.6 months in August.  The absolute number of homes for sales eased from 209,000 to 206,000, the smallest number of new houses on the market in 42 years, according to data supplied by the Commerce Department.

In a moment, I’ll take a look at how the supply of houses is more a function of sales rather than the absolute number languishing on the market.

For now, however, the theme remains little changed.  New home builders are facing a number of stiff headwinds, including competition from late-model foreclosures, lackluster consumer confidence, high unemployment and worries about the direction of housing prices.

First a quick explanation of the chart below. The left side measures new home sales (blue line) and the absolute supply of homes for sale (red line).  The right side of the chart measures the supply of homes in months based on current sales (green line).


(click chart to enlarge)

As noted by the chart above, housing sales peaked at just under 1.4 million units in July 2005.  Sales then began a downward descent (blue line) over the next five years that is yet to fully abate.

Since early 2009, the downward trend seems to have run its course, though the bottom we’ve seen over the past 18 months has been soft at best.

A moving target

In the meantime, the absolute number of houses for sales (red line) peaked at 566,000 annualized units in June 2006, steadily falling to the current level of just 206,0000.

But the 36% decline in actual homes on the market has been more than offset by an 80% collapse in sales from the peak.

Based on the current rate of sales, builders are stuck with a supply of 8.6 months, well above the average of 6.2 months going back to 1963 when data were first collected but down from the all-time high of 12.1 set in January 2009.

In addition to poor house sales, developers must also contend with the high number of foreclosures of late-model homes that were financed with a number exotic loans that buyers neither fully understood nor really qualified for, if realistic underwriting standards had been applied.

The absolute supply of houses is very near an historical low, and based on population growth over the past generation, inventory would be considered extremely thin. That is at least one favorable tailwind for the market in what has otherwise been a gloomy outlook.


 (click chart to enlarge)

And any burst in sales activity could even produce a shortage of homes available on the market.  Odds of this occurring are very remote at the present time.

But given current trends, builders are struggling (see …builder confidence in the basement), and the high number of foreclosures hanging over the market acts like a shadow inventory that continues to work against the market.