New Home Sales Rebound Solidly in May

New home sales rose 2.9 percent in May and sales for the previous three months were revised higher by a cumulative 34,000 homes. Sales rose solidly in the South and West but fell in the Midwest and Northeast.

A Fairly Strong and Fairly Clean New Home Sales Report

New home sales rose a solid 2.9 percent in May, reversing part of the prior month’s 7.9 percent drop. Revisions to the three previous months’ data were also encouraging. Sales were revised up by a total of 34,000 homes and April’s initially reported 11.4 percent drop was revised to a 7.9 percent drop. As we noted last month, new home sales are stronger than the data indicate. Sales in March were revised higher by 2,000 units to 644,000 homes, marking the strongest month since October 2007. While the revision data bring new home sales more in sync with homebuilder confidence, the absolute level of new home sales still pales in comparison to its historic norms. The Wells Fargo/NAHB Homebuilders Index (HBI) fell 2 points to 67 in June and has averaged 67.8 over the past six months. The last time the HBI was this high for six months was back in 2005 and new home sales were more than twice as strong as they are today. We do not expect new home sales to revisit the highs hit during the housing boom anytime soon. Today’s housing market remains a shadow of its former self and builders and developers have shrunk their businesses to meet this new marketplace. Today’s housing market appears to have a fairly low ceiling given constraints on lot development, the supply of construction workers and credit constraints facing many first-time buyers. The net result has been a very gradual recovery that has so far been more focused on the high end of the market, where builders tend to enjoy wider profit margins. The slow motion recovery in new home sales has made the sector more susceptible to quirks in the seasonal adjustment process, which has been particularly apparent in recent months. New home sales have been knocked around quite a bit this year by unseasonably mild winter weather, which boosted sales earlier this year. In addition, this year’s late Easter pulled sales forward into March and then weakened them in April. Most of the seasonal distortions are behind us and we now have a much clearer picture of the underlying trend in new home sales. Sales are clearly trending higher, particularly in the South, which accounts for roughly 60 percent of the nation’s home sales each year. Sales in the South are being driven higher by resurgent economic growth in Texas and continued strong gains in Florida, Georgia, the Carolinas and the eastern half of Tennessee. While the overall inventory of new homes available for sale rose to a 5.3-month supply in May, new home sales continue to be held back by a lack of inventory. Most of May’s rise in new home sales was for homes where construction has not yet started, which rose by 30,000 units. By contrast, sales of completed homes rose by just 4,000 units. Inventories of completed homes rose slightly in May but remain near their all-time lows at just 62,000 homes, suggesting that new home construction will continue to strengthen during the second half of the year.

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