New Home Sales Drop in December, Down 23% in 2009

New homes sales unexpectedly fell 7.6% in December to a seasonally adjusted annual rate of 342,000, the U.S. Commerce Department announced Wednesday. Demand weakened as the initial federal first-time home buyer credit expired, leading to the the lowest new home monthly sales total since March 2009.However, investors and potential home buyers should keep in mind that Congress extended and expanded the home purchase tax credit -- $8,000 for first-time buyers and $6,500 for current home owners -- and buyers now have until April 30, 2010, to sign a home purchase contract to take advantage of the incentive.

A Bloomberg News economists' survey had expected December new home sales to rise to a 370,000 annualized rate; new home sales totaled a 355,000 annual rate in November.

What's more, new home sales for 2009 fell 23% from the year before to an estimated 374,000 -- the lowest level since the Commerce Department started keeping records for the stat in 1963.

Inventories Again Creep Higher

Further, inventories, which had been trending lower for more than a half-year, unexpectedly rose again in December to an 8.1-month supply at the current sales pace, up from a 7.9-month supply in November, and a 7.2-month supply in October.

Also, in December the median sales price of a new home fell 3.6% compared to a year ago to $221,300.

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 the new home: furniture, appliances, home supplies -- an uptrend in each of which is good news for the economy and bullish for the U.S. stock market.

However, government statisticians also caution that the new home sales figures contains a margin of error and are subject to revisions. Further, economists note that it typically takes three to five months to detect a trend, so investors should not read too much into data from one month.

Housing Analysis

Without question, December's new homes statistic is disappointing. Further, when combined with the December existing home sales decline, it's now clear that many potential home buyers were motivated to buy as a result of Congress' home buyer tax credit. As the expiration date approached for the initial program, buyer demand for both new and existing homes declined. Hence, it's a good thing Congress renewed and expanded the program. Clearly, the U.S. economy is not generating nearly enough organic demand from household formation via job growth to support the housing sector.

Further, equally significant, inventories rose again in December to an uncomfortable 8.1-month supply at the current sales pace. So long as inventories remain above a 5-month supply, home prices will remain soft in most regions of the country.

Bottom Line: The housing market basically treaded water in 2009 with only modest progress regionally, and the sector will need all the demand it can get -- from private sector and public sector sources -- to continue to heal in 2010.
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