Housing Leaks a Little More Steam


By Michael Englund and Rick MacDonald After years of cruising in overdrive, the U.S. housing market appears to be shifting into a lower gear. Data released Oct. 27 showed a 2.1% rebound in new home sales in September, to a 1.22-unit million annualized pace, recovering marginally from the 11.6% plunge in August to a 1.197 million rate (revised from 1.237 million). But the September figure was below economists' median forecast of a 1.25 million-unit rate. And for the second straight month, data from prior months were all revised lower.

Combined with the smaller-than-expected September data, the figures showed a notably weaker trajectory for new home sales. And inventories of unsold homes increased as well.

GROWING BACKLOG. Regionally, the September strength was led by the Midwest (up 25%) and the South (up 6%). Similar to existing home-sales data released Oct. 25, the South may have been boosted by replacement demand following Hurricane Katrina. Sales in the West dropped 12%, while the Northeast posted a 20% sales decline.

Another worrisome sign: a growing supply of unsold new homes. Inventories rose another 3.1% in September, to a record 493,000 units. The weakness in sales and further gain in inventories left the months' supply of unsold new homes unchanged at 4.9 months, vs. 4.1 months in July. This represents the highest level of months' supply since December, 1996.

The median new home price dropped 5.7% on the month, to $215,700 from $220,300, marking the fourth time in five months prices have declined. The median was still up 1.9% year-over-year, as prices for new homes continue to consolidate after hefty gains through 2004, and the price data for the prior three months were revised upward. The average new home price dropped by a smaller 0.6% on the month, which left a 6.1% year-over-year gain.

NARROWING GAP. In total, the data revealed lean sales levels in August and September, following jumbo sales numbers in the March-July period. Weakness in the last two months was concentrated in the Northeast and West. In the Midwest and South, sales posted soft August readings but with a sizable September bounce. While sales reached unusually lean levels for the year on the two coasts, they reached notably high levels in the Midwest and South.

Price movement for this report is in sharp contrast to the 13.4% growth evident in median existing home sales prices. Median prices in both markets are now nearly equal, however, after a big 2004 divergence. It appears that builders in 2004 were quick to shift to constructing higher-priced homes, but the price of existing homes has now risen to the level of new homes, and prices for the new home market are now moderating.

Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics


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