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Daily Global Commentary

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New Homes – Hints of Market Recovery Are Visible

Sun, Jul 27 2008, 22:32 GMT
by Asha Bangalore

Northern Trust

New Homes – Hints of Market Recovery Are Visible

Sales of new homes increased 0.6% to an annual rate of 530,000 in June, after a downwardly revised decline of 1.7% in May. Estimates of new home sales during March – May were revised up noticeably. The upward revision and small decline, on a monthly basis, are both positives. On a regional basis, sales of new homes rose in the Northeast (5.3%) and Midwest (+2.5%) but fell in the South (-2.0%) and West (-0.9%).

On a year-to-year basis, sales of new single-family homes fell 32.9% in June, a smaller decline compared with the prior months (see chart 2). This is the second positive aspect. The largest decline in the current cycle appears to have occurred in April 2008 (-40.96%).

The inventory of unsold new homes edged down to a 10-month supply from 11.2-month mark in March, making the reduction in inventories the third positive aspect of the report. The March reading is probably the cycle peak.

In addition, the ratio of number of new single-family houses for sale to the number of new single-family houses sold is trending down, after having peaked in March 2008.

The fourth positive factor of this report is the fact that the year-to-year change in the number of completed homes for sales is now negative (-6.1%) after holding steady in May. This is the first negative reading since November 2003 (see chart 5). Effectively, production (supply) of new homes is shrinking.

The median price of a new single-family home rose 1.4% on a monthly basis to $230,900 but fell 2.0% from a year ago. The muted year-to-year decline in June compared with a 7.1% drop in May and a sharp 12.7% decline in March, is the fifth positive aspect of the new home sales report.

Putting the latest sales data of new homes in a historical perspective, sales of new single-family homes are down 61.8% from the peak in July 2005 (1.389 million units). The bottom appears to have occurred in March 2008 when sales were down 63.1% from the peak. The median decline in sales of new-single family homes from the peak to the trough is 46.9% during 1969-2001.

The median price of a new single-family home rose to $230,900 vs. $227,700 in May. Home prices appear to have bottomed in May 2008, putting the peak-to-trough decline at 13.3%. The median decline in prices of new single-family homes from the peak to the trough is 8.6% during 1969-2001. In sum, the market of new homes is mending gradually.

June Durable Goods Orders: Many Components Show Strength

Orders of durable goods rose 0.8% in June following a 0.1% gain in the prior month. During May and June, orders of defense items increased 14.1% and 15.8%, respectively, which provided the extra lift to orders of overall durable goods. Civilian aircraft orders have dropped in April (-24.6 %) and June (-25.1%) and advanced only 6.0% in May. Orders of non-defense capital goods excluding aircraft moved up 1.4% in June, following a 0.1% drop in May. Primary metals, autos, fabricated metal products, machinery, and electrical equipment, appliances and components posted gains in June, while orders of computers and electronic products fell.

Shipments of durable goods moved up 0.5% in June, after a 1.2% drop in the prior month. Shipments of non-defense capital goods excluding aircraft (input for capital spending in the GDP report) were up 0.7%. In the second quarter, shipments of non-defense capital goods excluding aircraft rose at an annual rate of 5.9% following a 0.4% drop in the first quarter. These numbers suggest that capital spending is likely to make a positive and noticeable contribution to GDP in the second quarter. The GDP report will be published on July 31.

Preliminary UK Q2 GDP Confirms Slowing Economy

Today’s preliminary Q2 GDP report from the UK showed real growth slowing to 0.2% on the quarter and 1.6% on the year, the weakest in three years and down from 0.3% and 2.3%, respectively, in Q1. A marked fall in construction output, the result of weakness in private house building, was largely to blame – down 0.7% on the quarter. However, the slowdown in the dominant service sector was also notable, with growth of just 0.4% on the quarter and 2.1% on the year, the weakest annual growth in 16 years.

This report will add to expectations that the Bank of England’s Monetary Policy Committee will leave interest rates on hold for the next few months.

Easing Credit Growth in Euro-zone

Today’s ECB data on credit and money supply showed that the pace of loan growth to the private sector is easing, coming in at 9.8% on the year in June, versus 10.5% in May.

In addition, the headline rate of growth in M3 money supply fell to an annual 9.5% in June from 10.0% the month before.

While the pace of credit and monetary expansion is still high for a slowing economy, the fact that they are easing all-but guarantees that the European Central Bank (ECB) won’t be making any more rate hikes in the second half of this year.

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Published on  Sun, Jul 27 2008, 22:37 GMT