Why new home sales faltered after their highest pace in a year

Phalguni Soni

Why this week’s key releases seem more about expectations (Part 4 of 9)

(Continued from Part 3)

New home sales

New residential sales data for February 2014 was released on Tuesday, March 25, 2014 by the U.S. Department of Commerce Census Bureau. The seasonally adjusted annual rate (or SAAR) came in at 440,000, down 3.3% from January’s reading of 455,000, which was revised sharply downward from the initially estimated 468,000.

What are new home sales?

This indicator records the sales of newly constructed homes within the U.S. The headline number is “new home sales,” which is issued on a SAAR basis. The SAAR is the seasonally adjusted monthly value times 12. The benefit of the annual rate is that not only can you compare one monthly estimate with another, but you can also compare monthly data with an annual total. The seasonally adjusted annual rate is neither a forecast nor a projection. Rather, it’s a description of the rate of building permits, housing starts, housing completions, or new home sales in a particular month.

Key takeaways from February’s new home sales report

New home sales for February 2014 clocked in at a SAAR of 440,000, in line with consensus estimates. However, new home sales declined 3.3% month-on-month and 1.1% year-on-year. The decline was attributed to the following factors.

  • A 1.5% sales decline in the South—the largest region by far for new home sales, exceeding all other regions taken together.
  • Low supply of new homes: the seasonally adjusted estimate of new houses for sale at the end of February was 189,000, or a supply of 5.2 months at the current selling pace. This was down from the 5.0 months supply last month due to the decrease in selling pace.
  • High prices were also a factor holding down sales. The median sales price for new houses sold in February 2014 came in at $261,800—up 0.4% from January, but down 1.2% year-over-year. The average sales price of new homes came in at $317,500.

Why are housing data releases important for investors?

Housing data releases are important economic indicators. Besides indicating an increase or decrease in housing activity, they also give guidance across other segments of the economy—especially for construction (ITB) and home furnishing (LOW) companies. As buying a home is a large investment, these are some of the strongest consumer confidence indicators. Since consumption comprises about two-thirds of the economy, a change in these indicators would have implications for the overall economy.

Housing market growth may have a second revival in this cycle

Despite the fall in new home sales, the housing market may revive again, based on historically low rates and pent-up demand. According to Fed Chair Janet Yellen at this month’s FOMC meeting, “There’s a lot of demographic potential there for new household formation that would ultimately generate new construction… And the level of rates I think does matter, and the fact that they’re low now is something that should serve as a stimulus to people coming back into the housing market.”

How can investors benefit?

One ETF investing in the housing sector is the iShares U.S. Home Construction ETF (ITB), which tracks the performance of the Dow Jones U.S. Select Home Construction Index. The index measures the performance of the home construction sector of the U.S. equity market. Top ten holdings for ITB include PulteGroup (PHM) and Home Depot (HD), with 9.99% and 3.9% of assets, respectively.

Housing demand also impacts demand for mortgages. Two ETFs that have exposure to mortgage financing include the Vanguard Mortgage-Backed Securities Index Fund (VMBS) and the iShares Barclays MBS Fixed-Rate Bond Fund (MBB). Both track the Barclays Capital U.S. MBS Index, which measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

To find out about another key housing market release that measures pricing, read on to Part 5 of this series.

Continue to Part 5

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