New Home Sales Up Slightly - Analyst Blog

New Home Sales rose by 1.6% in November from October, to a rate of 315,000. Relative to a year ago, sales are up 9.8%. While the monthly increase is more than welcome, it is still a very dismal rate of new home sales.

There was a upward revision to the October numbers of 3,000 from 310,000. The November level was also somewhat better than the expected rate of 315,000. Regardless of the changes at the edges, this is still a very bad level. The 19 lowest months on record (back to 1963) for new home sales have all been in the last 19 months.

New home sales have only exceeded the 400,000 level three times since September 2008 when the financial markets collapsed. The most recent time was in April 2010, as sales were inflated by the rush to get in under the wire and collect the homebuyer tax credit. Sales collapsed after that.

Relative to the peak of the housing bubble (7/05, 1.389 million), new home sales are down 77.3%. Prior to September 2008, there had only been 20 months in which new home sales were below the 400,000 level, with the most recent being in 1982 (which was a time of a very nasty recession brought on by sky-high interest rates inflicted by the Fed to break the back of inflation). The graph below shows the history of new homes sales (blue, left scale) along with the growth in population (red, right scale), since presumably if you have more people, you will need more places for them to live.

Take a very close look at the relationship between new home sales and the grey recession bars. New home sales fall sharply before all recessions (with the exception of the bust, which caused recession of 2001) and then start to increase sharply in the middle of, or towards the end of, the recession. That clearly is not happening this time around.

If you want to know why the recovery has been anemic so far, look no further than the graph above! New home sales are vital to the overall economy. If new homes are not selling, then home builders have no reason to build more of them. After all, that is very expensive inventory to sit on.

Unlike used home sales, each new home built creates a huge amount of economic activity. Not only are low new home sales bad for the big homebuilders like D.R. Horton ( DHI ), but also for all the companies that make the products and supplies that go into making a new house. They range from Berkshire Hathaway ( BRK.B ) for bricks, roofing materials and insulation to Masco ( MAS ) for plumbing fixtures and cabinets to USG ( USG ) for wallboard to PPG Industries ( PPG ) for glass and paint to Plum Creek Timber ( PCL ) for lumber.

In terms of employment, it is not just all the roofers and framers that lose jobs due to weak new home sales, but employees at all the firms that make the stuff that goes into making a new home. Of course, if those employees are out of work, they are not spending on other goods and services, dragging down a host of seemingly unrelated businesses.

Not that the direct impact of construction jobs should be underestimated. Since the recession started, 34% jobs lost have come from the construction industry.

BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report

D R HORTON INC ( DHI ): Free Stock Analysis Report

MASCO ( MAS ): Free Stock Analysis Report

PPG INDS INC ( PPG ): Free Stock Analysis Report

USG CORP ( USG ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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