New Home Sales Up; Previous Months Revised Down

MBA (5/28/2008 ) Velz, Orawin
New homes sales rose by 3.4 percent in April to a seasonally-adjusted annualized pace of 526,000, the first increase since October 2007. However, the increase followed downward revisions of previous months’ figures.
April’s sales pace was the same as the pace initially reported for March, and the drop in March new home sales were revised down to 11.0 percent from a previously reported of 5.3 percent. Sales of new homes during the first four months of this year were down 36.7 percent from the same period last year. Sales have declined about 62 percent since their peak in July 2005. Sales increased in three regions: 41.7 percent in the Northeast; 5.8 percent in the Midwest; and 8.3 percent in the West. Sales dropped 2.4 percent in the South.

The number of homes available for sale fell 2.4 percent to 456,000, the 12th consecutive monthly decline and the lowest level since June 2005. The steady decline in inventory reflected considerable cutbacks in single-family homebuilding.

A drop in inventory and an increase in sales pace pushed the months’ supply down to 10.6 months in April from 11.1 in March (previously reported as 9.8 months). Despite the decline, the months’ supply stood at the fourth-highest reading since the inception of the series in 1963.

Another indicator of sluggish housing demand was the sharp increase in the time houses have spent on the market. The median number of months rose to 8.0 months in April, the highest level since record keeping began in August 1988. The median number of months on the market averaged 5.7 months in 2007.

The median price for new homes rose 1.5 percent in April from a year ago, the first year-over-year increase in the past five months. The increase followed a sharp drop of 14.1 percent in the previous month. The reason for the increase in home prices may be due to a change in the mix of sales: the only region where sales declined last month was in the South, where a typical home costs much less than in the Northeast and the West, both of which saw big increases in sales in April.

A separate report from Standard and Poor’s showed that the decline in existing home prices accelerated in the first quarter of this year. The S&P/Case-Shiller Home Price Indices track repeat sales of the same single-family house over time. They are therefore a better indicator of home price trend than average or median home prices, which can be distorted by the mix of sales of low- and high-priced homes.

The S&P/Case-Shiller quarterly national composite index was down 14.1 percent in the first quarter from a year ago, following an 8.9 percent year-over-year decline in the fourth quarter of 2007. The drop was the biggest since the series began in 1987. It has now fallen about 16 percent from its peak in the second quarter of 2006.

Another home price measure using the repeat sales transaction methodology is available from the Office of Federal Housing Enterprise Oversight, which uses mortgage data from Fannie Mae and Freddie Mac. The first quarter data was released last week. The purchase-only index (which excludes refi transactions, making it more compatible to the Case-Shiller index) declined 3.1 percent in the first quarter from a year ago after a year-over-year drop of 0.5 percent in the fourth quarter of 2007.

The OFHEO purchase-only index showed a much more modest decline in home prices than the Case-Shiller national index because it excludes jumbo loans and under-represents subprime and adjustable rate mortgage loans. The Case-Shiller index may have captured more of the impact of foreclosed homes, which are sold at a deep discount. Both subprime and adjustable-rate mortgage loans have seen sharper increases in their foreclosure rates than prime and fixed-rate loans. One drawback of the Case-Shiller national index is that it does not cover the wide geographic areas that the OFHEO index does.

Finally, a report from The Conference Board showed that consumer confidence continued to slide. The Consumer Confidence Index fell 5.6 points to 57.2 in May, the fifth consecutive drop. The index has reached its lowest reading since October 1992.

Both the present conditions component and expectations component fell. The measure of expectations for the next six months slumped to 45.7, the lowest reading on record. Rising energy prices, volatile stock markets, falling house prices and credit market concerns likely weighed on confidence.

Consumers’ assessment of current labor market conditions deteriorated modestly. The share of consumers finding jobs plentiful fell to 16.3 percent, the lowest level since April 2004. The share finding jobs hard to get rose to 28.0 percent, the highest since November 2004.

Plans to buy homes dropped to their lowest levels since October 1982; plans to buy autos also dropped sharply; but plans to buy appliances held steady. Consumer expectations of inflation over the next year soared to 7.7 percent, the highest level on record back to 1987.

So far the tax rebates have failed to lift consumers’ mood. Another main measure of confidence, the University of Michigan Consumer Sentiment Index, fell in May to a 28-year low.

The Consumer Confidence Index, which is based on survey results of more than 5,000 households, is highly regarded by the financial markets and the Federal Reserve as a gauge of future consumption spending. Sustained declines in confidence—especially in the expectations component—signal a potential slowing consumption spending growth ahead. Yesterday’s reports from The Conference Board and Standard and Poor’s suggested that consumer spending growth could be at risk as home prices declines have accelerated. Declining home prices reduce home equity and household wealth, inducing households to save more and moderate their spending.

Inflation-adjusted consumer spending increased 1.0 percent (annualized rate) in the first quarter, the weakest since the second quarter of 2001. April figures, which will be released on Friday, will give us a glimpse of how consumers held up going in the second quarter.