Wednesday, June 23, 2010

New home sales distorted by incentives

The big drop in new home sales in May was most likely "payback" for strong sales in April, which in turn were fueled by people rushing to take advantage of the soon-to-expire homebuyers tax credit of $8,000. As Brian Wesbury notes, the underlying level of sales is consistent with the very low level of new construction we have seen for the past year, and does not therefore represent any new deterioration in the economy. Bear in mind as well that residential construction has fallen to its lowest level relative to the economy (just over 2% of GDP), so even if new home construction were to weaken substantially from here it would have a minimal impact on the overall economy.

... new homes were sold at a 446,000 pace in April, but fell to a 300,000 rate in May. The underlying trend is probably in between, or 373,000 per year. For comparison, in the past two months, single-family homes were started at a 517,000 annual rate. Of the 517,000, we estimate that roughly 150,000 do not need to be sold because the plot has already been sold. That leaves 367,000 per year that need to be sold (517,000 minus 150,000), which is right in-line with the pace of sales. In other words, as bad as today’s report was, it does not signal a need for home builders to slow down the pace of construction. Confirming this, today’s report showed that the inventory of new homes declined 1,000 to 213,000, the lowest level since 1970.


Benjamin Cole said...

That is one doozy of a chart. The ugliest depression in homebuilding since the 1930s.
Two percent of GDP? Including all related activity, such as furnishing sales, real estate broker fees, jobs in home finance etc? I think the industry has a multiplier.
If there is good news in this ghastly chart, it is that probably only good news lies ahead---it can't get worse than this. I hope.

Paul said...

So another one of Obama's dumb gimmicks blows up in his face and he hands us the bill. I just did not see this coming from a socialist community organizer.

Public Library said...


You can squeeze Obama's contribution to this chart in the last cm on the right buddy. You have some seriously delusional glasses on.

This chart reflects decades of government meddling in the housing market via ill conceived tax incentives on debt and decoupling interest rates and default risk via GSE's.

My concern is this amounts to peanuts if you compare it to the intervention of the Federal Reserve in the last few hears...

Paul said...


I don't disagree with what you say. I was commenting on the stupidity and waste of the credit. I wouldn't mind Obama's constant whining about the mess he "inherited" if he offered a way out. Instead, he digs the hole deeper at a staggering pace.

John said...


I think you have another good point here. The housing mess we are in has its roots in decades of government meddling in the housing credit markets. IMO both parties have had their fingers in the political housing pie and/or have turned a blind eye because important people were making a lot of money. The gross mispricing of risk for constituents has been a political goody bag members of both parties have regularly tapped for a long time.

Incidently, Bloomberg is quoting Scott Simon, head of mortgage securities trading at PIMCO as saying prices of government backed mortgage securities are in "rarified air". Some are trading at more than a 6% premium to par. This is for a bond that can present its owner with a significant loss if prepayments rise.

This is just my cheap opinion but to me bonds are a very crowded trade and have been for some time. Bond bears are being shouted down and shoved aside. Buyer/owner beware.

UFormula said...

Scott, I think you underestimate the effect that the huge glut of homes will have on consumer psyche.

Having this high inventory will suppress home prices and consumer confidence. If this happens, then spending will go down and while you point out that construction makes up 2%, spending does account for 70% of the economy

Scott Grannis said...

Consumers have had almost five years to get used to the idea that home prices are very weak. Prices have adjusted massively, and financing costs are way down. I see an equilibrium in the housing market that has lasted about a year, despite all the warnings of a coming glut of homes for sale. The housing collapse is yesterday's news.

Public Library said...


Completely agree. Government intervention has unintended consequences and when they are pushing around huge sums of money, the calamities are magnified.