Wednesday, February 28, 2007

New Home Sales Plunge

From Bloomberg:

New-home sales in the U.S. fell last month by the most in 13 years, pointing to more weakness in the real-estate market that limited economic growth last year.

The 16.6 percent decrease to an annual rate of 937,000 in January, less than any economist had forecast in a Bloomberg News survey, Commerce Department figures showed today. The pace of sales was the slowest since February 2003. A measure of housing inventory rose to the highest in three months.

The figures show home construction will remain a drag on the economy even with lower borrowing costs and more incentives from builders. More cuts in home prices may be needed to stir buyer interest as builders keep reporting increased rates of canceled orders.

OK -- the housing market has not bottomed in any significant way.

Here are some other thoughts.

1.) Mortgage rates are low right now. In addition, the 10-year Treasury has rallied, further lowering rates. Interest rates aren't the issue.

2.) Are sub-prime mortgage problems and increasing credit standards starting to filter through the market? We saw the first wave of sub-prime mortgage problems later last year, and a second wave recently. If these two events are related (but remember we have a correlated not causation related events) we could have further drops in the next few months.

3.) Are household debt levels starting to hamper further debt acquisition? Household debt is now over 90% of GDP and 120% of overall national disposable income. Debt payments as a percentage of disposable income are are record highs. Are these factors starting to restrain the housing market?