Why did the new home sales collapse in March this year?

Market Realist

Must-know update: The new home sales crater in March (Part 1 of 3)

February new home sales, as reported by the Census Bureau and the Department of Housing and Urban Development, decreased 14.5% from February

New home sales decreased to an annualized pace of 384,000—down 14.4% from February (which was revised up from an initial estimate of 440,000, to 449,000) and down 13.3% from a year ago. Activity picked up in the Northeast but fell everywhere else. The excuse du jour—the weather—has run its course and can’t be used here. It’s important to understand that this number is an estimate, and these numbers are often revised several times. Investors should appreciate that these estimates can be volatile, and shouldn’t read too much into any one specific number.

Restricted supply has been the theme of the U.S. housing market over the past year

At the end of February, there were 193,000 new homes for sale, representing a six-month supply. The median time a new home has been on the market shrunk from nine months last summer to the current figure of five months. As professional investors have become major players in the real estate market, we’re seeing bidding wars for properties in the hardest-hit markets, like Phoenix, and even strong markets, like Washington, DC. For all the fears that a flood of properties would hit the market and drive down prices, the opposite problem has occurred.

Prices are rising as luxury outperforms entry-level homes

The median sale price for a new home was $290,000, and the average price was $334,500. These numbers aren’t based on a repeat sales methodology. So, you can’t project nationwide existing home prices from these figures. On balance, the jump in prices implies that more activity is happening at the high price points. We’ve seen virtually every homebuilder report double-digit increases in average selling prices. The NAHB has reported that the average size of a new home has increased 300 square feet from 2009 to today. So, while prices are rising, part of that increase has been due to the product mix. That said, the report showed that the sweet spot for new home sales has been in the $200,000 to $299,000 range. The builders with more exposure to the entry-level buyers would be PulteGroup (PHM), D.R. Horton (DHI), and Lennar (LEN). The luxury segment would be represented more by Toll Brothers (TOL). Investors who want to invest in the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

Continue to Part 2

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