New Home Sales Unexpectedly Plummet to Record Low

The housing sector began the new year on a very sour note, as new homes sales unexpectedly plunged 11% in January to a seasonally adjusted annual rate of 309,000 -- the lowest rate since the U.S. Commerce Department started keep records in 1963.What's more, new home sales have now fallen 6.1% in the past 12 months.

A Bloomberg News economists' survey had expected January new home sales to rise to a 360,000 annualized rate. They totaled a revised 348,000 annualized rate in December and a 362,000 rate in November.

Inventories Leap Higher

Further, inventories, which had been trending lower for more half a year, unexpectedly rose again in January to a 9.1-month supply at the current sales pace from an 8.1-month supply in December and a 7.9-month supply in November.

Also in January, the median sales price of a new home fell 2.4% to $203,500, compared to a year ago.

In January, new home sales plunged 35% in the Northeast, fell 12% in the West, and decreased 10% in the South; they rose 2% in the Midwest.

Investors should follow the new homes sales statistic because, historically, increases in home sales are strongly correlated with greater demand and an economic expansion -- and decreases are linked to the opposite. However, government statisticians also caution that the new home sales figures contain 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.

This unexpected decline in home sales raises questions about the federal government's initial home buyer credit program, which was nearing expiration at the end of last year: Did that tax incentive account for the bulk of new home sales, and without it, will there be enough organic demand to create a thriving new home sale market?

Potential home buyers should keep in mind that the U.S. Congress extended and expanded the home purchase tax credit -- to $8,000 for first-time buyers, $6,500 for current home owners -- and buyers now have until April 30, 2010 to take advantage of the program.

Also, inventories are trending in the wrong direction. The current, unhealthy 9.1-month supply level will certainly weigh on home prices in the quarters ahead.
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