Disappointing New Home Sales
The December new home sales report wasn’t great because November’s reading was revised lower and December’s reading missed the low end of the estimate range. It’s not consistent with the recent strength in housing data especially housing starts, but it’s not weak enough to suggest a new trend is forming. Specifically, in November, sales were revised down by 22,000 to 697,000. The current cycle high is 729,000 in June 2019. New home sales lead the cycle by the longest out of the most common leading indicators. Cycle peaks occur before other metrics turn. There is no indication that a new cycle peak won’t be made in 2020. Hovering near the peak isn’t problematic.
As you can see from the chart below, new home sales in December were 694,000 which missed estimates for 728,000 and the lowest estimate which was 719,000. Real residential investment growth is still going to be strong. The Atlanta Fed’s residential growth estimate from before this report came out was 5.5%. The advanced Q4 GDP report will come out on Thursday. This was the weakest new home sales reading since July. Personally, I don’t look at yearly or monthly growth in this index, but if you do, recognize that the comps will get tougher as 2020 goes on (except for the sharp declines in May & July). I don’t care for yearly growth because there are random sharp movements that can be revised later anyway. A moving average is more reasonable. The quarterly average was 698,000 which was 1,000 below the cycle high in Q3.
Regional Gyrations, Price, & Inventory
New home sales in the South have cratered in the past few months. This is the most important region for housing. Sales fell from 410,000 to 347,000 in December which is the lowest reading since October 2018 (largest percentage sequential decline since March 2015). In 3 months they have fallen 94,000. Considering the region’s population dynamics, it makes sense to expect an upturn. The sharpness of this decline is unsustainable. On the other hand, sales in the West should moderate the other way as sales were up 57,000 to 241,000. That’s 99.2% yearly growth which is the highest reading since April 1983. Even for a volatile index, this was a big increase. The other 2 regions were more normal as sales were down 4,000 sequentially in the Northeast to 30,000 and they were up 7,000 in the Midwest to 76,000.
Renaissance Macro projects overall new home sales growth will be 10% in 2020. That means there will be a new cycle high, which implies there won’t be a recession in over a year. The recent decline in long rates will provide a modest boost to housing in January. At this point, there’s not much to gain from lower rates since they are already low. It’s more about avoiding a potential rise. For example, the 10 year yield is at 1.61% which is near its record low of 1.38% in July 2016. It’s 1 year high is 2.77%. I don’t believe we will ever see negative mortgage rates. Obviously, it’s possible for the 10 year yield to make a new record low. As you can see from the chart below, grouping new home sales by the decade, makes the 2010s look weak because it took years to recover from the housing bust. It still hasn’t fully recovered.
The median single family new home sales price was $331,400 which is up 0.5% from last year. It is 3.5% off its record high in November 2017. The median existing home price is $274,500 which is 3.8% off its record high in June 2019. Lower rates have helped housing prices.
At the current sales pace, the supply of homes increased to 5.7 months which is up from 5.5 months. The recent low was 5.3 months in September and the recent high was 7.4 months in December 2018. The inventory balance has improved since the end of 2018, but it’s different from existing home inventory which is at a record low.
Another Regional Fed Index Improves (4 for 4)
The Dallas Fed index was similar to the Kansas City index in that it improved, but was still negative. So far, 4 out of 4 manufacturing regional Fed indexes have improved. On the other hand, the flash Markit manufacturing index fell. Let’s see which side the ISM index falls on. It has been underperforming both metrics recently. As you can see from the chart below, the Dallas Fed general activity index rose from -3.2 to -0.2 which beat estimates for -3.1 and the highest estimate which was -1. I’m surprised estimates were that low considering that every regional Fed index has improved.
The production index increased from 3.6 to 10.5. The new orders index exploded higher by 16 points to 17.6. The growth rate of orders index was up 11.1 points to 6.1. The shipments index rose 5.6 points to 8.6. This was a very solid report. The outlook index was up 0.6 to 1.9, and the outlook uncertainty index fell 2.9 points to 2.7 (low uncertainty is a positive). The 6 month expectations index was good too. The production index was up 2 points to 38.9 and the general business activity index rose 1.2 to 7.6. New orders and shipments were up 7.5 and 8.2 points to 40.1 and 38.3.
Within the comments section of this report, a computer and electronic product manufacturing firm stated, “Industrial manufacturing is robust—the best I have seen in the last 10 years.” That’s very weird because manufacturing has been in a borderline recession recently. It’s possible manufacturing growth improved in January, but it’s highly unlikely to be at a multi-year high. A beverage and tobacco product manufacturing firm stated, “I am worried about the oilfield slowdown.” I’m not sure why a beverage firm would be worried about oil activity decreasing, but that’s certainly happening with the decline in oil prices this year. A chemical manufacturing firm stated, “A decrease in car sales has a negative effect on our customers’ volume.” I’m expecting modest weakness in vehicle sales in 2020.
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