Wednesday, September 27, 2006

New Home Sales Beat Lowered Expectations

This morning, the Census Department announced new home sales of 1.05 million for August. This was better than expected, but it wasn't good news.

Some insist it was good news. After all, August sales were up 4.1% from July. However, July sales were revised downward, and there is a good chance that August sales will also be revised downward. So this 4.1% gain doesn't provide much comfort. Furthermore, August sales were down 17.4% from August 2005, and the median sales price was down 1.3% during the same time. Any way you look at it, the new homes market is weakening just like the existing homes market.

Fortunately, many of the large homebuilders are publicly traded companies. As a result, we can get a better handle on what is really going on in the industry. The latest news came out of Lennar Corp. (LEN). The company announced better-than-expected earnings, but expectations weren't very good to begin with. In fact, earnings were down almost 40% from a year ago. The gross profit margin fell 760 basis points. New orders also fell. Management reduced earnings guidance for the fourth quarter.

Homebuilders are making concessions to keep selling. But buyers are getting smart. They are expecting even more and bigger concessions. They are also holding out for lower prices. Even falling mortgage rates haven't been enough to lure them off the fence.

Despite current problems, the overall housing market is still healthy. Will things level off nicely as those hoping for a soft landing say? Or will they deteriorate so badly that the economy sinks into recession? My view is somewhere in between. The housing slowdown will be worse than most economists are currently predicting. Yet I still believe we can avoid recession. A tax cut would certainly do wonders at the moment, but that seems about as likely as a camel passing through the eye of a needle.