New Home Sales

New Home Sales jumped 6.1% from April to May. The increase was impressive in strength; well above average and just barely within the confines of normal. However, one month does not a trend make. The 44.3% seasonal run up in the three-month-moving total since January shows the steepest seasonal gain since 2004. The new homes inventory is estimated to have declined to a healthy 4.7 months. New home prices are rising (the median is now $234,500) and mortgage rates are extremely low. Conditions are good for this important segment of the US economy to add more fuel to the general economic growth trend already in place.

The input from New Home Sales is wholly consistent with our forecast for the U.S. economy in the second half of the year. Relax and enjoy the good news for a minute.

There will be a tendency by some parts of the media and others to straight line the good news of the last three months and an unwarranted optimism will develop. It won’t be long before you start hearing people talk about a build rate of 1.5 million again. That is just not going to happen anytime in the next few years. Stay realistic with your estimates of your sell rates if you are a builder and your sales estimates if you are selling to builders. Our projections of higher energy costs next year and the impact of the Dodd Frank Act portend a slowing in the rate of recovery in New Home Sales. The quarterly year-over-year growth rate (3/12 rate-of-change) has potentially shifted to the back side of the business cycle (Phase C), signaling that the general rate of recovery in New Home Sales will be slowing in the second half of this year.

This is a good time to bring up our forecast for Housing Starts. The annual year-over-year comparison (12/12 rate-of-change) is a good leading indicator of general economic activity. Right now, the year-over-year comparison is signaling more recovery in the US. However, the underlying quarterly year-over-year comparison just notched lower, and accordingly is providing an early signal of a near-term 12/12 high (as projected by ITR). The onset of 12/12 descent will be an early indication of the general economic slowing we are forecasting for the second half of 2013.

This means that while other folks are celebrating the obvious good news, ITR Economics and each of you are already seeing the clouds forming in anticipation of the late 2013/2014 economic storm. Yes, that makes us out of synch with everyone else and that is exactly what happens when you see half a business cycle ahead of everybody else. That half a business cycle is your competitive edge.