This morning, New Home Sales for August were reported, and it was not a pretty picture. Nationwide sales fell 8.3% from July to a seasonally adjusted annual rate of 867,000. Relative to a year ago, sales were down 21.3%. Inventories came down slightly, to 529,000 from 537,000 in July and 568,000 a year ago, but nowhere near as much as sales.
As a result, the months supply continued to build, rising to 8.2 months from 7.6 months in July and 6.8 months a year ago. This was just slightly below the 8.3 months registered in March. Combined with the 10.0 months of supply of existing homes reported on Tuesday, this paints a bleak picture.
Simply put, there are simply too many homes available for sale in the country and it will take a long time to work off the excess supply. On a non-seasonally adjusted (actual) basis, there were 68,000 new homes sold in August, down from 88,000 a year ago. This was the lowest number of new homes sold in any August since 1995.
However, it was not a uniform decline across the country. The regional disparities were huge. In the Northeast, sales surged by 42.3% from August, although they were still down 14.0% from a year ago. Similarly, in the Midwest sales jumped by 20.5% for the month, but were 11.2% below a year ago levels. It should be noted that all regions are not equal when it comes to New Home Sales; even with the good showing this month, those two regions combined represented only 26.2% of all new home sales (up from 18.9% in July).
The West saw the biggest decline in August, falling 20.5% from July levels and 16.0% from a year ago. The extremely important South region declined 14.7% for the month and is down 21.7% from a year ago. Even with the decline, the South represented 51.2% of total sales.
It should be noted that the New Home sales data is presented with very large standard errors and is subject to significant revisions. The regional standard errors are significantly larger than the national one. Thus the data is sort of a best-guess, and the reality might be not as bad -- or it could be much, much worse. The nationwide 90% confidence interval is +/- 12.4%. This means that the Census bureau is 90% sure that the real change from July is between up 4.1% and down 20.7%. The smaller the region, the larger the confidence interval is, reaching the truly absurd in the case of the Northeast where the confidence interval is 66.7%, so we are only 90% sure that the actual change from July is between up 109.0% and down 24.4%.
Despite the shortcomings of the data, it is the best we have to work with. The data is revised three times, and the month July was revised down by 3,000 sales. Since New Home Sales peaked in July of 2005, the vast majority of the revisions have been downward. The median decline by the time all is said and done after the third revision is a drop of 4.8% from the originally reported level. If Augusts' revisions were to match that, then the final level of August new home sales would be 757,000.
That would be roughly half of the July 2005 peak level. Does that suggest we are close to a bottom? No. At the bottom of each of the last four housing cycles (1974, 1980, 1982 and 1991), New Home Sales were around 400,000. Even adjusting for population growth, that suggests that there could still be much more weakness ahead.
For some strange reason, most of the major publicly held homebuilders are up today on the news. This strikes me as totally irrational. Until at least two of the following firms go into chapter eleven, I would suggest avoiding them all: D.R. Horton (DHI), Standard Pacific (SPF), Hovnanian (HOV), Beazer Homes (BZH), Centex (CTX), Toll Brothers (TOL), KB Homes (KBH), Pulte Homes (PHM) and Lennar (LEN). In a massively oversupplied market, there is simply zero economic need for these firms until the supply is absorbed. Capacity will have to come out of the system, and that is not really going to happen on the scale that is needed until some of these folks go belly up.
Once the excess capacity is gone, the survivors might make for some very profitable investments, but it really is to early to know who the ultimate survivors will be. And even if you knew, you can probably pick them up cheaper six months from now than you could buy them today.
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