New-Home Sales on a Slippery Slope

The housing sector's slump appeared to worsen considerably in December. A report released on Jan. 28 shows U.S. new-home sales fell 4.7%, to a 0.604 million-unit annual rate in December, from a revised 0.634 million in November (from 0.647 million previously).

Declines were evident across three of the four regions, with only the Northeast managing an increase. Unsold inventories of homes rose to a 9.6 months supply, up from 9.4, to the highest level on record going back to the late 1980s. There were 495,000 homes for sale, vs. 502,000 in November.

And there was more bad news on the home price front. The median home price dropped to $219,200, vs. November's upwardly revised $245,900. This big drop, the largest since 1970, exceeded the usual seasonal pattern. The result was a hefty year-over-year median price decline of 10.4% that followed an unusual 2.4% year-over-year rise in the November figures.

Even Weaker Than Existing Figures

Overall, it is clear the downtrend in housing remains pervasive and sizable, with the biggest quarterly decline of this cycle occurring in the most recent quarter. The December new-home sales drop, following the downward revision in November, leaves in place an ongoing steep downtrend that will keep housing market fears in full force until at least the next monthly round of sales reports.

The Jan. 28 data were even weaker than the existing home sales figures for December released on Jan. 24, which showed a 2.2% drop to a 4.890 million-unit pace, and a median price undershoot to $208,400. Both sales declines followed the 2.6% drop in pending home sales in November that tend to lead sales by a month. The sales declines fell short of the big 14.2% December drop in housing starts and 8.1% drop in permits.

We will continue to expect a construction spending drop of 0.6% in December that would accompany the 1.1% drop in December construction hours worked.

Surprisingly Good Except for Housing

The housing data remain consistent with a 29% rate of contraction in residential construction in the fourth-quarter GDP report that would exceed the 20.5% third-quarter pace of decline.

Yet even in the fourth quarter, the economy, excluding the housing sector, performed surprisingly well, as "ex-housing" GDP will have posted a 2.4% fourth-quarter growth clip if our estimated 1% GDP gain for the period is actualized. This follows ex-housing GDP growth rates of 6.2% in the third quarter, and 4.6% in the second.

Although the declines in the housing market are dramatic, it remains the case that this sector on its own is too small to pull down overall GDP substantially via the direct effect of reduced residential construction. If we are going to see the proverbial "pass-through" of the sector's weakness into the broader economy, it will likely be spurred by the effects of credit market turmoil or the wealth effect associated with falling prices.