NEWS / Foreign Exchange

New Home Sales Recovery is Marginal, Underlying Trend Remains Weak

Sales of new homes increased 2.6% to an annual rate of 858,000 during March, following declines in February (-4.2%) and January (-14.4%). Earlier estimates of new home sales for the three months ended February show downward revisions. New home sales are down 37.2% from the peak of 1.367 million units established in July 2005 (see chart 1). The important question now is if the bottom has been established. Based on the status of inventories of unsold new homes, the price trend, anecdotal reports from home builders, and home builders??™ survey reports in recent months, it appears that the bottom could possibly still be months ahead.

Sales of new homes increased in the Northeast (+50.0%) and Midwest (+9.8%) but fell in the South (-2.7%) and the West (-0.9%). The median price of a new single-family home was up 0.9% during the month of March to $254,000. The sharp increase in new home sales in the Northeast could have led to the increase in the median price. On a year-to-year basis, the median price of a new single-family home rose 6.4%, the largest increase since June 2006.

There was a 7.8 month supply of unsold new homes in the market in March, a small improvement from the 8.1-month mark in February. The median number of months to sell a new home continues to trend up (5.6 months vs. 3.9 months in March 2006).

Sales of new and existing single-family homes have dropped for six quarters in a row. The good news is that although the decline in sales is in double digits, there is a moderation in the pace of decline. This is evident in the fact that sales of new and existing single-family homes fell 14.7% and 11.8% on a year-to-year basis in the third and fourth quarters of 2006, respectively, followed by a 10.5% drop in the first quarter of 2007. But, it is important to note that home sales continue to drop and that a single monthly gain of 2.6% is inadequate for a full fledged recovery.

Capital Spending Concerns Will Remain on FOMC Priority List For A While Longer

Governor Mishkin noted last week that capital spending is the second major concern of the FOMC. Capital spending fell at an annual rate of 4.8% in the fourth quarter and it is quietly likely to show a decline or a soft performance in the first quarter (the Q1 GDP report will be published on April 27). In March, the durable goods reports shows that shipments of capital goods excluding aircraft, the input for capital spending in the GDP report, rose 0.7% after holding steady in February and posting a 3.1% drop in January. On a quarterly basis, inflation-adjusted shipments of non-defense capital goods excluding aircraft fell at an annual rate of 12.7% during the first quarter of 2007 vs. a 6.4% decline in the fourth quarter of 2006. On a year-to-year basis, orders and shipments of non-defense capital goods have both turned negative (see chart 5). The bottom line is that capital spending continues to show noticeable weakness.

Orders of durable goods rose 3.4% in March, largely due to a 37.6% jump in orders of civilian aircraft following a 101.6% gain in February. It is nearly certain that a large drop in orders of aircraft is likely in April. Bookings of defense goods fell 22.4% in March, a reversal is possible in April. Excluding defense and aircraft, orders of durable advanced 4.7% after two monthly declines.

Shipments of durable goods increased 0.8% in March after dropping in January and February. It is also noteworthy that shipments of computers and electronic products have declined for two consecutive months.