NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: January New Home Sales

KEY DATA: Sales: -0.9%

IN A NUTSHELL: “Rising builder confidence should start showing up in more contracts for new homes being signed as we go through the first half of the year.”

WHAT IT MEANS: Home construction has slowly been on the rise and that trend is likely to continue. While new home sales eased in January, it came after a large upward revision to the December numbers. When I see the data revised upward, it usually means that activity is accelerating through the month and that trend is not picked up in the first calculations.

The National Association of Homebuilders’ confidence index hit its highest level in four years with the sales index surging. That may not have shown up in the sales data yet but it will. Thus, the small drop in new home purchases in January should not be taken as a signal that the sector is faltering again.

What is of concern was the huge differential in demand across the country. Sales jumped sharply in the Northeast and South but fell by double-digits in the Midwest and West. Weather issues in the Midwest may have played a role there while the overhang of distressed homes is likely keeping down new home purchases in the West. Prices are still quite soft and three-quarters of the homes are going for less than $300,000.

The McMansions of the past two decades have become the MiniMansions of this decade. Builders are keeping the supply of new homes on the market tight and the number of homes for sale is lowest in the nearly fifty years the data have been collected. At current selling rates, the inventory is at its lowest level in six years.

MARKETS AND FED POLICY IMPLICATIONS: While sales eased, all the signs are for the new housing segment to continue to recover this year. However, housing in general is being restrained by mortgage and appraisal issues while the new home portion will continue to be buffeted by the acceleration of the foreclosure process.

There were about 7,000 jobs added in the residential construction industry in January and we could be seeing those types of gains continue for a while. We are starting off the year at a sales pace that is well above what was recorded during 2011 so I expect the market to improve and add to growth all year.

Investors may look at the headline number and be a little troubled. But the pace is actually above what most of us had forecasted given the original December sales pace so people should not be disappointed. As good as the economic data may seem, the issue remains energy and the surge in the price due to uncertainty over Iran.

You have to hand it to the Iranians, as long as they can sell their oil, by saber rattling they have managed to get the price up sharply and their revenues are surging. Of course if the bank restrictions sharply curtail their exports, oil prices could rise even further so until the Iranian crisis eases, look for high and rising gasoline prices.

The jump in gasoline prices curtailed the recovery last spring and it is likely to slow things once again. And of course the Greek situation is still a work in progress. It just seems that the only luck the recovery has is bad luck.

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RE/MAX Connection Realtors is not a licensed financial advisor and is not providing any financial advice. You should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors only is providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.

RE/MAX Connection Realtors, 1000 Lincoln Drive East, Suite Two, Marlton, NJ 08053 www.goconnectionnj.com.