Providing Some Context for a Solid New Home Sales Number in June
We know it is the busiest day of corporate earnings, but there is more data out there than just EPS. For example, new home sales (yesterday) rose 8.3% in June versus May to 497,000, the highest level since May ’08. There is some speculation that some of the strength in the number is demand being pulled forward because of a fear of higher interest rates, but the supply of new homes on the market (3.9 months of supply versus 6 months as an average) and prices remain healthy (+7.4% year over year), reflecting what we consider to be the solid internal dynamics of the housing market.
Rather than focus on the reported number (a solid data point, to be sure), we wanted to dig a little deeper and look at the long-term relationship between existing and new home sales (Exhibit 1).
Exhibit 1: New and Existing Home Sales
For much of the data set, there is a close relationship between the sale of new homes and the sale of existing homes – that makes sense, as purchasers should largely be indifferent between the two. That multi-year relationship broke down in spectacular fashion during the ’07 to ’08 time frame, where we think that a large part of the relative strength in existing home sales was explained by distressed sales.
Looking at the relationship between the two numbers over time (Exhibit 2), we see that the gap between the two data sets is closing, at an accelerating rate. Ultimately, we expect the gap to close completely as the “distressing” aspect of existing home sales continues to decline as prices continue higher. We think that, as the gap continues to shrink, it will be a positive sign for overall prices as “distressed” sales become a smaller and smaller component of the mix going forward, allowing builders to compete more effectively with the price of existing homes (foreclosed or distressed properties obviously have lower price points).
Exhibit 2: The Relationship between Existing and New Home Sales
Finally, in Exhibit 3 we see that the level of new home sales still has room to grow versus what we consider to be a normalized historical period. This is wholly consistent with our analysis that the level of new home sales has been artificially depressed by distressed home sales and that the trend is improving in terms of the overall mix of home sales.
In conclusion, we continue to think that the recovery in the housing market is well-begun and sustainable, to the benefit of equities with leverage to the housing sector – LOW and HD in our universe, though we can expand that list to include names such as WSM and BBBY. We see several sources of pent-up demand for housing (lower stay at home rates, higher movement rates) and, importantly, we see the housing market closer to equilibrium in terms of price and homeownership rates than it has been at any point in the past 5 years.
Exhibit 3: New Home Sales