New Home Sales: Bad News for the Economy

January new home sales were reported yesterday and they fell the most since 2009 when the economy was in recession. New home prices plunged to a two-year low. Anyone expecting an economic recovery in the US and more Fed rate hikes should wake up and smell the coffee.

Why do new home sales matter? First, they are a great economic indicator because home construction is a major employer and new home sales drive the purchase of appliances and building supplies. Second, new home sales have been a primary focus of government and Federal Reserve policies to stimulate the economy. The latest numbers seem to suggest those policies are not working.

New home sales collapsed by 9.2% in January, bringing the Seasonally Adjusted Annual Rate to 494k (December 2014 levels).

Here is the 15 year history of new home sales. Note how anaemic the so-called housing recovery has been since 2011 (see below):

The year over year change in new home sales looks even worse.

New Home Sales

Worse still, the average new home price has tumbled in recent months from $295,800 to $278,000. Remember how the industry was claiming that prices were being pushed up by a shortage of new homes? Not so much. Inventory measured in months of supply surged in January from 5.1 to 5.8.

My suggestion: don’t own economically-sensitive stocks.