Wednesday, August 25, 2010

Analysis: New home sales tumble, show downside of government intervention

Ugh. The news just doesn’t get any better.  If this is a “recovery summer,” I shudder to think what fall might bring.  Reuters even manages the gall to slip the media’s favorite adverb, glumly reporting that new home sales plunged “unexpectedly.”

The 276,000 unit annual rate of new home sales is the lowest since Commerce began the series in 1963.  Let that sink in a moment.  Not since John F. Kennedy was shot has the new home market been this dead.

Analysts polled by Reuters had forecast new home sales unchanged at a 330,000 unit pace last month.

"What we are seeing is the downside of government intervention. It had fanned expectations of a market bottom when in fact, it created a false bottom," said Tom Porcelli, a senior economist at RBC Capital Markets in New York. "We expect home sales to stay at this remarkably low range with remarkably high unemployment. There is also little demand for lending."

The housing market has wobbled following the end of a popular home tax credit in April, which had boosted sales and construction. The sector was at the center of the longest and deepest recession since Great Depression and its continued weakness is holding back the broader economic recovery.

Data on Tuesday showed sales of previously owned homes dropped in July to their slowest pace in 15 years. While the end of the tax credit is distorting the housing data, a 9.5 percent unemployment rate is also worsening the situation.

The weak sales pace last month resulted in the supply of new homes available for sale spiking to 9.1 months' worth from 8.0 months' worth in June.

The only thing the tax credit did was front-load transactions in the housing market, causing people who would likely buy anyway to do so ahead of schedule.  And, since they were probably already qualified, it means that the program needlessly added to the deficit while deceiving markets into thinking the housing sector had bottomed out.  It clearly hasn’t. Combining this with yesterday’s existing home sales bloodletting paints a very ugly picture for the real estate market. 

But the new home sales data are much more important in terms of economic growth, for a very big reason.  Residential Investment (RI) is a leading indicator for GDP and only reflects investment in new homes.  Sagging numbers in existing home sales don’t have much of an impact on GDP, because their contribution to GDP represents transactions costs only (brokerage fees, survey cost, loan origination fees, etc).  New home sales have a much larger impact, because the value of the home itself and all associated transactions costs are counted in the measure of output.

With July figures this bad, and with very sluggish job creation over the summer, there is no indication that August and September are going to get much better. As a result, RI could be a major millstone for Q3 GDP.   We’ll get the first revision in Q2 GDP tomorrow Friday.  A key component of that will be the RI figure, which showed some strength in the preliminary release.  If the RI component is revised downward, and the current trend in employment and income continue, it doesn’t portend well for Q3 GDP, or Q4 GDP going forward.

Update:  Calculated Risk has a post about the “distressing gap” between existing an new home sales, and how that gap won’t be closed until inventory is worked down (especially “distressed” inventory, which isn’t gonna work down until prices work down).

Gimme some feedback in the comments.