Disappointing New Home Sales in November May Be a Tax Credit Glitch

New homes sales unexpectedly plunged 11.3% in November to a seasonally adjusted annual rate of 355,000, the U.S. Commerce Department announced Wednesday. Demand tapered off as the popular federal first-time home buyer credit was originally set to expire at the end of the month. It was eventually, however, extended by Congress.Congress renewed and expanded the credit to $8,000 for first-time buyers and $6,500 for existing home owners for purchases before April 30, 2010.

A Bloomberg News economists survey had expected November new homes sales to rise to a 440,000 annualized rate rate.

In addition, October's new home sales were revised lower to a 400,000 annual rate, down from the previously released 430,000 rate; new home sales totaled a 393,000 annual rate in September, and 408,000 in August.

New home sales are now down 9% in the past year -- and, in the first 11 months of 2009, sales are down 24% compared to the same period a year ago.

In November, new home sales fell in three of four U.S. regions. They plunged 21.1% in the South, 9.2% in the West and 3.3% in Northeast. However, sales surged 21.4% in the Midwest.

Also, the median sales price of a new house in October was $217,400, down 1.9% in the past year.

Inventories Creep Higher

Inventories, which had been trending lower for more than a half-year, unexpectedly rose in November to a 7.9-month supply at the current sales pace, up from a 7.2-month supply in October.

Investors should follow the new homes sales statistic because, historically, increases in home sales are strongly correlated with increased demand and an economic expansion. That's because housing activity does not operate in a vacuum. When new homes are sold, homeowners tend to buy durable goods and big ticket items for their new homes: furniture, appliances, home supplies – which is, naturally, good for the economy and bullish for the U.S. stock market.

Housing Analysis

November was definitely a disappointing month for new home sales, and the end of the initial federal tax credit for first-time home buyers played a role. The original November 30 deadline probably led to an early slide in traffic as new home sales are based on signed contracts, rather than closings. If home sales resume their upward arc in subsequent months, however, that will further confirm the positive impact of the extended housing credit.

Another disappointing November data point: Inventories rose to a 7.9-month supply. Still, it's only data from one month, and given the nearly year-long inventory decline, it's not enough to change the narrative that inventories are falling as builders cut back supply, and home owners trying to sell are lowering prices to match what buyers are willing to pay. That said, if inventories continue to rise in subsequent months, that would be a danger sign for the housing sector, and for the U.S. economy.
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