- US new home sales fell almost 33% from April to May—a record monthly decline—and May's existing home lagged estimates.
- Existing home sales fell by a much lesser amount—just 2.2%—but also lagged estimates.
- The indeterminate impact of a housing tax credit on demand skews this already volatile data tremendously, making meaningful analysis difficult.
- Housing data will likely be choppy for some time as the effects of the tax credit persist.
Heads were spinning Wednesday with the latest housing market data. The National Association of Realtors reported new home sales fell almost 33% from April to May—a record monthly decline. May's existing home sales fell by a much lesser amount—just 2.2%—but also lagged estimates. This data might have seemed disappointing, stoking fears of a renewed downturn in housing and maybe stocks. But the May hangover was inevitable—let's not forget home buyers were on a bender in prior months, hoping to take advantage of government incentives—and tells us little about the state of housing and even less about stocks' direction.
New home sales, which are measured at contract signing rather than closing, were expected to decline following the April 30th expiration of the federal Homebuyers Tax Credit. But the drop's magnitude was larger than anticipated. Yet before anyone culls one month's data into a trend indicating something worse, the indeterminate impact of a housing tax credit on demand skews this already volatile data tremendously, making meaningful analysis difficult.
The Homebuyers Tax Credit offered an $8,000 incentive to purchase a home for first-timers, but deals had to be inked by April 30th. So buyers who might have otherwise purchased a home in May or later likely bought early for the tax advantage. Not surprisingly, the result was a home buying spike in the months leading up to the program's expiration, followed by a drop-off in May. To some, the decline fuels the argument the tax credit was ineffective and simply pulled purchases forward rather than generating new demand. That may be true—many such government programs don't produce the desired results—but the housing market could be finding its footing even without the tax incentive.
We saw similar government-induced distortions in auto sales with 2009's "cash for clunkers" program. Automakers saw sales demand surge in July and August before pulling back in September, when the program ended. A spokesman for the Department of Transportation noted 250,000 cars were sold in the first four days of the program—which to us positively reeks of demand distortion. Additionally, a study shows 565,000 of the 690,000 new vehicles sold under the program would have been purchased anyway—though perhaps at a later time.
Housing market meddling today makes it difficult to gauge the market's exact health. Housing data will likely be choppy for some time as the effects of the tax credit persist. But encouragingly, there are some signs of stabilization. Existing home sales are up 19.2% over the previous year, mortgage interest rates remain close to historic lows, housing affordability is near all-time highs, and home prices have risen a bit since their lows earlier this year.
And don't confuse housing fundamentals with stock market fundamentals. Some folks wrongly believe housing and stocks move in lockstep. While it's true housing played a role in the last recession and accompanying bear market, housing peaked long before stocks did and bottomed long after.
The only sure cure for a hangover is to wait it out (let us know if you got anything better). Eventually, housing data will normalize and investors will be able to get a better read on that market. But stocks are likely to continue higher with or without housing market clarity.