NEWS / Foreign Exchange

Jump in New Home Sales a One-Off Event

We would not read too much into today??™s report showing a big increase in April new home sales.  The monthly new home sales data have a 13% margin of error and are subject to frequent significant revisions and problems with seasonal adjustments.  In addition the median sales price for single-family homes dropped 11% from March and 10.9% from a year earlier, the largest decline since 1970.  This indicates that the sales increase, even if correct, was largely a one-off event caused by drastic price cuts to clear excess inventories.
 
Even with the jump in sales, inventories of completed units in April remain at a very substantial 175,000, only slightly less than the 180,000 reported for February and March, while the median house is on the market for six months, compared to 3.6-to-3.9 months for most of last year.  It is therefore likely that new home sales will decline again in coming months.  The vast majority of other housing indictors also point to further weakness.  The NAHB housing Index has declined for the last three months, and is at its lowest level since 1991.  Home building executives continue to report poor conditions and back up their pessimism by continuing to dump options to purchase land.  Furthermore, as Barry Ritholtz points out in the Big Picture, there have been 10 double digit increases in monthly new home sales since 1992, and 8 were followed by declines in the following month.

Adding to the case for continuing housing weakness is the strong prospect of tightening by the leading home lending regulators.  According to ISI??™s Washington office, John Dugan, Controller of the Currency, strongly criticized so-called "stated income loans".  These are loans that are made without documentation of income or assets by the borrower.  The prospective borrower merely states his income and gets the loan.  Dugan states that studies show that income is inflated by 50% or more in 60% of stated income loans and that 43% of mortgage brokers know that the borrower wouldn??™t otherwise qualify for the loan.  It is not without reason that the trade refers to these as "liars loans".  Regulators believe that loans with little or no documentation are not appropriate in the sub-prime loan market or in the alt-A market as well.

Until relatively recently the inability of so many borrowers to meet their periodic payments was masked by the big appreciation in home prices.  Now, however, the regulators are beginning a strong crackdown that is certain to reduce the availability of credit as well as the number of people who qualify for loans.  The downward pressure on home sales and prices is therefore likely to continue for some time.  As we have previously shown (please see archives for past comments) the housing mess is already having a negative effect on consumer spending and will probably spread to the rest of the economy.  The peak in industrial production usually lags the peak in real consumer spending by one quarter, while the peak in capital expenditures lags by two-to-four quarters.  Even in normal residential building cycles a sharp decline in housing sales has almost always led to a hard landing or recession.  Given the recent speculative boom in housing we see no reason why this time will prove to be an exception.