Markets & Finance

Getting a Bead on the Housing Market


U.S. housing data appear to be as changeable as the winter weather. Just look at January's new-home sales report, released Feb. 26. The report showed a 5% drop on the month, to a 1.233 million-unit annual pace, well below economists' median forecast of 1.270 million.

The surprisingly weak January report, which came on the heels of an upside surprise in December, countered the weather-related swings in other January housing sector releases: a 14.5% surge in housing starts, a 6.8% rise in permits, and a rise of 46,000 in construction employment.

We at Action Economics continue to expect a 3% rise in existing home sales in January, and a 2% gain in January construction spending, despite the drop in new-home sales.

MIXED PICTURE. New-home sales should prove the "odd man out" in January, just as in December, but in reverse. New-home sales rose by an upwardly revised 3.8% in December, alongside declines of 6.9% for starts, 4.1% for permits and 5.8% for existing-home sales. Construction employment posted a minor 5,000 gain in December, while construction spending posted a 1% increase, thus leaving a somewhat more mixed picture in December.

Among other components of the January report, the median new-home price series extended its pattern of upward revisions, and posted a surprising 4% gain in January that left the year-over-year figure at 6.7%. The average price rose 3.5% on the month, and 3% year-over-year. Strength in demand for many categories of construction materials is likely squeezing profit margins in the new construction business, and builders may be pushed toward targeting higher-priced homes.

Regionally, the West significantly outperformed, with a gain of 11%, while the other three regions posted declines of 10% to 15%. Inventories of unsold homes increased 2.9% in January to a new record of 536,000 units. The gain left inventories up 21.5% year-over-year and months' supply at 5.2 months, up from 4.8 months. This marks the highest level of months' supply since October, 1996.

SEASONAL SHIFT? One note about the two series of home-sales data: Existing-home sales are counted when escrow closes, while new-home sales are counted when a contract is signed, which sometimes occurs even before the house is built. Thus, trends in new-home sales tend to lead existing-home sales. While month-to-month swings in each series often diverge, the average levels often match up fairly well.

While sales activity appears to be slowing, the unusual sales patterns in recent months -- and the unseasonable weather -- makes the "leading" role of new home sales difficult to apply. The spring will be crucial for evaluating the current strength in the housing sector and sales trends for both new and existing homes.

As we frequently note, new-home price gains sharply outpaced existing home price increases in 2004, as builders focused activity on higher-priced properties. In 2005, existing home prices rapidly caught up, though the diverging gap in price movement between new and existing home prices, widely discussed during 2005, was consistently narrowed after the fact via upward revisions to the new home price data.

BLOOM OR WILT? As we enter 2006, we are seeing renewed strength in new-home pricing, alongside what many assume will be a moderating trend in existing-home prices. Clarity on the trajectory of existing-home prices will await the seasonally important second-quarter period, which dominates the annual "price discovery" process for the sector.

The housing data remain quite choppy and are consistent with expectations of a gradual moderation in growth for the sector nationwide through 2006. Expectations of such a slowing is supported by anecdotal reports of jitters in last year's "hot" markets. Americans will be anxiously watching to see if the housing sector wilts -- or continues blooming -- in the spring months.


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