New-Home Sales Plunge 12.4% to All-Time Low in July

It's a summer for the record books in the beleaguered U.S. housing sector -- and not in a good way. New-home sales unexpectedly plunged 12.4% in July to a 276,000-unit annual rate -- the lowest level since the U.S. Commerce Department started keeping records for the statistic in 1963.

Economists surveyed by Bloomberg had forecast new-home sales would rise to a 340,000-unit annual pace in July from a revised 315,000-unit rate in June. Instead, they fell, and the June revision lowered last month's sales gain from the previously-released 23.6% rise to a to 12.1% rise. Revised sales rates for May and April came in at 281,000 and 414,000, respectively.

When combined with July's 27.2% plunge in existing-home sales to a 3.83-million-unit annual rate -- that metric's lowest level since 1999 -- the picture is one of a U.S. housing sector that is cratering since the home buyer tax credit program ended on April 30. New-home sales have plummeted by about 33% since April -- roughly the last month when a buyer could purchase a new-home and still meet all the deadlines to qualify for the tax credit.

Inventories rose to a problematic 9.1-month supply in July at the current sales pace, up from a 7.6-month supply in June. A normal market has a roughly three- to five-month supply of new homes for sale.

Potential Home Buyers Are Understandably Cautious

New home sales fell in every region in July: down 13.9% in the Northeast, 8.3% in the Midwest, 8.7% in the South, and a stunning 25.4% in the West. The median sales price was $204,000 in July, a 4.8% decline from a year earlier, and substantially worse than the 0.6% year-over-year decline recorded in June.

Given the current new home sales pace, the July data also suggests the new home sale market will need about three quarters, perhaps longer, to return to a normal 700,000-unit to 800,000-unit annual rate.

The factors weighing on both new and existing home sales are largely macroeconomic. With inventories high, Americans sense that home prices will be lower in three or six months, which is causing many potential buyers to delay making purchases, calculating that they'll get a better deal down the road. Given the current real estate trends, chances are they'll be right.

Prospective home buyers are also concerned about the durability and strength of the U.S. economic recovery, which slowed in mid-2010, and its impact on the weak job market. Historically, periods of employment uncertainty have taken a percentage of buyers out of the housing market.

July's new home sales report paints a picture of a U.S. housing sector that lacks enough organic demand to push sales higher in a sustained way. The steep declines in both new and existing homes sales have occurred during the summer season -- historically a strong period for home sales.

When combined with the slowdown in the U.S. manufacturing sector, the abysmal conditions in the housing sector reflect the ongoing loss of momentum in the U.S. economic expansion. Absent a large rise in business investment, retail sales or exports, those tepid growth conditions could continue well into the fourth quarter, and if business investment or exports decline, a double-dip recession could occur.