David Rosenberg, Merrill Lynch North American Economist, made the following comments on the recent existing and new home sales data:
* The downturn in the housing market is going from bad to worse. Coming on the heels of yesterday’s dismal results in the existing home sales report — featuring a runup in unsold inventory to a 15-year high — today’s new home sales data showed a big 6.6% decline in June to 834,000 units at an annual rate. The market was bracing for a much more moderate decline to around 890,000. This is why the mortgage application data are such a poor housing indicator when credit conditions start to tighten. Note as well that the May tally was revised down to 893,000, from 915,000; so in reality, this was an 8.9% slide off the unrevised May data-point.
* New home sales are officially down 40% from the cycle peak reached in July 2005, and are now just five percentage points away from surpassing the peak-to-trough move during the vicious cycle of the early 1990s and seven percentage points from breaking the slide in the early 1980s’ downturn. This cycle has already broken the 34% aggregate decline in the early 1970s, so we are basically on the precipice of seeing the very worst housing cycle of all time. Any new sales number of 775,000 or lower will do the trick, and the latest pullback in the NAHB housing index suggests that this is a very strong likelihood. Since the Federal Reserve hinted at the start of the year that the worst of the housing downturn was over, new home sales have declined at a 33% annual rate.
* The details of the new housing sales report were not good. The inventory-sales ratio rose for the second month in a row to 7.8 months’ supply — flirting near the highs for the cycle. When the residential real estate market managed to carve out a decisive bottom after the recession of the early 1990s, the unsold inventory had unwound to between five and six months’ supply. The inventory backlog is particularly acute for completed units because the unsold stockpile was 31% higher in June than it was a year ago, and sales fell nearly 7%. It is against this backdrop that home prices continue to deflate and force the homebuilders to take, in some cases, unprecedented asset write-downs.
* Moreover, and in a sign of how difficult it is becoming for the builders to move product in this current tighter credit environment, the median length of time it is taking to sell a home after it is finished has risen to six months. This compares to a 3.6-month lag a year ago, and is the sharpest increase over a 12-month period ever recorded. You have to go back 14 years to see the last time that the month of June was this much of a struggle to make a sale of a completed home — not just in terms of duration, but also in terms of price. The median price of a newly built home fell 1.3% sequentially in June and is now down 15% at an annual rate since the turn of the year. If we were to replace the owners’ equivalent rent series in the CPI with new home prices, then the headline inflation rate would be 1.5% right now and the core would be 0.5% — making the Fed’s job a little easier in terms of moving toward a more neutral policy stance.