New Home Sales Plunge in December

In December, sales of new homes declined, prices fell, and inventories were the highest on record. The headlines of home sales reports have not changed for several months. A noteworthy difference between existing and new home sales is that the former actual rose in December (+6.0%), partly due to fire sale prices for foreclosed property. The fact that sales of existing homes increased in December is a positive signal. The January Home Builders survey results were also gloomy. The main message from the December report is that homebuilders will continue to reduce production of new homes.

The Fed’s purchase of mortgage securities and plan to buy long-term Treasury securities are supportive factors for lower mortgage rates which in turn should spur home sales in the months ahead. In this regard, the recent trend of the Housing Affordability Index of the National Association of Realtors is encouraging. The December reading of the index (158.8) is at the highest level on record (see chart 2) which reflects the impact of falling home prices, income levels, and low mortgage rates. It appears that favorable mortgage rates and home prices may be the dominant factors of the index at the moment. In any case, employment conditions have to improve to make the best of this opportunity.

Details of the new home sales report:

  • New sales fell 14.7% to an annual rate of 331,000
  • Year-to-year decline is 47.7%
  • In 2008, new home sales dropped 6.3%
  • Regionally, sales fell in all four regions, with the Northeast (-28.2%) and West (-20.2%) recording the larger declines. Sales of new homes fell 5.6% in the Midwest and 12.1% in the South.
  • Median price was $206,500 in December,
  • Year-to-year decline of median prices is 9.3% vs. an 11.8% drop in November
  • Median number of months to sell a new home is 9.3 months, new record

The inventory of unsold new homes rose to a 12.9-month supply in December, the largest on record.

An alternative way of looking at the inventory situation is the ratio of the number of unsold completed new single-family homes to the number of completed homes sold (see chart 4), which is at the highest level on record (14.5 months). Both measures of inventories point to a problematic situation.

From a historical perspective, the decline in home sales from peak to trough in the current cycle (table 1) is the largest on record (-76.2%). The drop in the median price from peak to trough in the current cycle (table 2) is also the largest on record (-21.4%)

Durable Goods Orders Post Sharp Drop in December

Orders and shipments of durable goods fell in 2.6% in December, after a downwardly revised 3.7% drop in November (previously estimated as a 1.5% decline). Shipments of durable goods also dropped 0.7% in December, after a downwardly revised 4.2% decline in November (previously estimated as a 3.1% drop). The declines in orders of durable goods were widespread. The tally for fourth-quarter shipments of non-defense capital goods excluding aircraft (input for equipment and software component of GDP) is significantly weak.

Inflation adjusted shipments of shipments of non-defense capital goods excluding aircraft plunged to an annual rate of 18.0% in the fourth after a 4.7% drop in the third quarter. In the GDP report, equipment and software spending fell at an annual rate of 7.5% during the third quarter.

Initial Jobless Claims: Labor Market Picture for January is Bleak

In addition to staggering layoff announcements in January across a wide spectrum of firms, the actual number of folks filing for unemployment insurance climbed to 588,000 (+3000) during the week ended January 24. Continuing claims, which lag initial claims by one week, advanced to 4.776 million and the insured unemployment rate increased to 3.6% (cycle high) from 3.4% in the prior week (see chart 7). The January employment report is likely to show a grimmer picture of the labor market compared with the December data.