July New Home Sales

Joel L. Naroff
President and Chief Economist

INDICATOR: July New Home Sales
KEY DATA: Sales: down 13.4%; Prices (Year-over-Year): up 8.3%
IN A NUTSHELL: “Builders may be optimistic but with sales down sharply, those rose colored glasses may be turning a totally different color.”
WHAT IT MEANS: Wow!  That is about the only way I can put it.  After a sharp rise in June, I had assumed a modestly pull back in new home purchases in July but what we got was much more.  New home purchases tanked in July as demand dropped back to December 2012 levels.  Households apparently decided to abandon the new home market and since these are contract signings not closings, that is a real concern.  The solid existing home numbers were partly a consequence of the time lag between agreements and closings.  We are still working through spring purchases because it is so difficult and time consuming to get a mortgage these days.  That is not the case when it comes to new home purchase numbers.  The problems were across the nation with three of the four regions posting declines in the 13% to 16% range. Only the Northeast, where sales fell “only” 5.7%, could you say that the market held up reasonably well.   As for prices, they were up solidly over the year but there has been a steady easing in sales prices over the past few months.  Since the price data are not seasonally adjusted, it is hard to know if the monthly changes are reflecting weakness or just normal patterns.
MARKETS AND FED POLICY IMPLICATIONS: This was an ugly report. But we need to be cautious when there is such a large fall off in demand with no real supporting data.  July housing starts and permits and August builder confidence were up.  It is hard to understand why developers would pay for permits, start construction and feel that conditions are getting better if people are not signing up for their product. It just doesn’t make sense.  So let’s wait a month to see if this was just a glitch in the data or a real trend. That said, the August report comes out a week after the FOMC meets next so this decline will hang over the discussion.  Why?  Because these are “real time” contract signings, not lagged closings.  If the higher mortgage rates were having an impact on the housing market, it would be seen first in these data.  While I can say that we should not make any decision based on these numbers, the FOMC will have to use them as input into their discussions. The members will be looking at disappointing chain store sales and mixed housing numbers.  The confusion at the Fed is understandable.  The economic data are not all pointing to strong growth ahead, which raises questions about the desirability of starting tapering sooner rather than later. As for investors, as long as an exchange doesn’t go down again, they will probably not be pleased with the economic implications of these numbers.  To the extent they argue for the Fed to wait, they could be taken either positively or negatively.   No, seriously.  Sometimes investors want the Fed to start and sometimes they don’t so I just throw up my hands (or just throw up) trying to figure out how the markets will react to any one economic number on any given day.

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