January New Home Sales

KEY DATA: Sales: -9.2%; West: -32.1%; Median Prices: -4.5%

IN A NUTSHELL: “Every once in a while you get a really weird number and the huge decline in new home sales in the West perfectly fits that description.”

WHAT IT MEANS: Yesterday, we saw that existing home sales eked out a small increase in January. Of course, many were expecting a decline, so the rise was a pleasant surprise. The only part of the country where sales were off was the West and the drop was fairly modest. Today, the new home sales numbers were released and once again, demand was off in the West. However, the decline was eight times as great for new home sales than existing home sales. So what happened? I don’t know, so if you do, please fill me in! Huge ups and downs in the numbers happen periodically and what you have to do is simply grin and bear it. Meanwhile, sales were pretty much flat in the rest of the country, with the Northeast and South showing gains while the Midwest was off. As for home prices, the median value was down over the year for the second consecutive month and third out of the last four. That is opposite of what is happening in the existing home market, where prices remain quite firm. There appears to be a shift to somewhat lower-priced new homes. The percentage of sales in the less than $200,000 range rose from 19% in January 2015 to 23% this year.

MARKETS AND FED POLICY IMPLICATIONS: So, what is the condition of the housing market? Given the inexplicably large drop in the West, I would have to guess that conditions remain solid. The number of homes under construction is rising and it is doubtful that builders would spend the money moving dirt and putting up structures if traffic and expected sales were not holding up. I am assuming housing has not faltered, which is important given that consumer confidence is easing, probably in reaction to the problems in the stock markets. With investors marching to the beat of oil prices, rather than economic fundamentals, the volatility is likely to continue. But while some may believe the markets are the be-all, end-all of economic indicators, Fed members don’t necessarily think that way. Yesterday, Fed Vice Chair Stanley Fischer said: “If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years–including in the second half of 2011–that have left little visible imprint on the economy, and it is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.” In other words, the markets forecast upcoming recessions almost as well as economists. Actually, we do a little better, but that is not the point. Focusing on the equity markets may not provide a lot of knowledge about the economy. As I’ve pointed out before, a decline in one sector, such as oil, that has long-term positive offsets, or a rise in the dollar that simply reduces earnings translation should not matter greatly when talking about the domestic economy. The FOMC meets in three weeks and the members have been quiet enough about the next move to take the March meeting off the table. But if it is the economy, not the markets, that is driving Fed decisions, we need to watch the economic data, not the S&P 500. Before the April 26-27 meeting, two employment and inflation reports will be released. We also should have a good idea about first quarter GDP, which comes out on April 28th. Don’t count out a move in April just yet.