New Home Sales are Down, so Why the Optimism?

Mish Shedlock |

New home sales in June unexpectedly plunged 6.8% to 482,000 annualized units, far below any Bloomberg Consensus Estimate

 Volatility is common for new home sales and there's plenty of it in the June report, where the headline plunged 6.8 percent to a far lower-than-expected annual rate of 482,000 and where revisions erased 40,000 from the prior two months.

But there is some good news in the report and that's a surge in supply of new homes on the market, up 3.4 percent in the month to 215,000. Greater supply points to greater sales ahead. On a sales basis, supply is at 5.4 months vs 4.8 and 4.7 in June and May.

Prices look soft in the report, at a median $281,800 which is up 0.5 percent in the month but down 1.8 percent year-on-year. The latter reading points to deep discounting compared to the year-on-year sales gain of 18.1 percent.

Regional data show big drops in the West and the Midwest in the month and a smaller drop in the South. But the Northeast is showing life with a second straight solid gain. Year-on-year, the South and Northeast lead with respective sales gains of 23.7 and 23.1 percent with the West and Midwest lagging at 10.9 and 5.7 percent.

Seven Month Low

Reuters is also reporting that new home sales are at a seven-month low

 New U.S. single-family home sales fell in June to their lowest level in seven months and May's sales were revised sharply lower, in what appeared to be a minor setback for the housing market recovery.

New home sales dropped 6.8 percent to a seasonally adjusted annual rate of 482,000 units, the lowest level since last November, the Commerce Department said. May's sales pace was revised down to 517,000 units from the previously reported 546,000 units.

"You never want to see the data regress, but we remain optimistic that we're still on a long-term upward trajectory," said Tom Wind, vice president of home lending at EverBank in Jacksonville, Florida.

Despite two straight months of declines in new home sales, the overall housing market recovery remains intact.

Writers Seem Illogically Upbeat

Reuters called this a "minor setback," further stating that the "overall housing market recovery remains intact."

Is the recovery intact? How could the writer possibly know? Bloomberg says "Greater supply points to greater sales ahead."

Is that what greater supply points to, or does it point to builder over-optimism coupled with another round of homes built on spec in hope that buyers show up later? Which is it? How could the Bloomberg writer possibly know? While pondering those questions, let's put a little perspective on new home sales and new homes for sale.

New One-Family Homes Sold 

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New One Family Homes for Sale 

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That's "the good news" in perspective.

Problems With the Good News Scenario

The key problem with these upbeat forecasts is that homes are not affordable for the one set of buyers that matter most: millennials. Millennial family formation is low because of student debt overhang, low wages, high prices, and changing attitudes.

In regards to changing attitudes, millennials have seen what debt has done to their parents, and do not want to follow the same path. Millions have moved back home with their parents because that's all they can afford.

Instead of chasing the suburban dream like their parents, millions more prefer to live in cities close to where they work. To top it off, mortgage rates have been rising. Fed rate hikes may push rates even higher. And the higher rates go, the less house one can afford.

Yet, the housing recovery is allegedly "intact".

Is it? How can anyone possibly know? Here's one thing we do know: This report will shave a bit off of second quarter GDP estimates. It will also give the Fed another reason to not hike rates in September. 

 

For more of Mish's insights and opinions on markets in the US and across the globe, follow this link to Mike Shedlock’s blog. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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