They indicate the economic recovery is unsteady
The unexpected sharp drop in new home sales in the United States last month, coupled with rising mortgage delinquency rates, illustrates the delicacy of the current economic recovery after a brutal downturn.
The bursting of the housing bubble – which had been inflated by a lax credit environment – set off the worst US recession since the Great Depression of the 1930s.
While the economy shows signs of bottoming out, the surprise 11.3 per cent drop in new home sales in November suggests Americans are still treading cautiously around major purchases, with recovery still tied to government money, analysts and investors said last week.
‘Many people are looking at the rally in the stock market as a typical V-shaped recovery, that what worked before is going to work again,’ said Keith Springer, president of Capital Financial Advisory Services, a money manager in Sacramento, California. ‘They are not taking into account the demographic cycle that is changing. The biggest thing going on is you have an aging demographic turning from net spenders to net savers.’
Retirement-age Americans, many of whom have seen the value of their savings decimated by the drop in stock and house prices, are selling the large homes they raised their families in and buying smaller, more affordable dwellings.
The uncertain outlook for housing has some investors shying away from the sector, which includes Pulte Homes Inc, D R Horton Inc, Lennar Corp and Hovnanian Enterprises Inc.
Over the past month, builders including Hovnanian and Toll Brothers Inc posted quarterly losses that were worse than Wall Street expected.
‘It’s so cyclical, and it makes it really difficult to get an accurate read on what their business might really be worth,’ said Greg Estes, portfolio manager with Intrepid Capital Funds, of Jacksonville, Florida.
In another bearish sign for the housing market, US mortgage company Freddie Mac said last week the delinquency rate on its single-family mortgage portfolio jumped 0.18 percentage point to 3.72 per cent in November, well above its year-earlier level of 1.52 per cent.
One factor that hurt November new home sales was shoppers’ fear that an US$8,000 tax credit for first-time home buyers would expire at the end of the year. While the Obama administration has since extended that credit through mid-2010, the threat of its expiration pushed some sales earlier into 2009, analysts said.
‘The November new home sales number was crushed by the looming expiration of the new home buyer’s tax credit,’ said Pierre Ellis, senior economist at Decision Economics in New York.
New home sales likely remained weak in December, a seasonally slow period for the housing market as Americans focus more on holiday revelry than moving homes, said Paul Dales, US economist with Capital Economics in Toronto.
‘Sales activity is likely to remain weak in December and the following few months as the pipeline of transactions is rebuilt,’ Dales said.
Analysts cautioned, however, that new home sales represent a relatively small slice of a market dominated by existing homes. Sales of existing homes were higher than expected in November, rising 7.4 per cent, according to National Association of Realtors data released on Tuesday.
‘With the large number of existing homes on the market, new homes have not been selling as well as existing homes in the past few months,’ said Gary Thayer, chief macrostrategist at Wells Fargo Advisors, in St. Louis. ‘Home builders are not as ready to discount new construction as owners of pre-owned homes are. There is more urgency for individual owners to sell existing homes.
Source: Business Times, 28 Dec 2009