Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

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Thursday, July 27, 2006

What Are the New Home Sales Really Telling You?

June NEW home sales were posted at -3% to 1.13M units annualized, and May was revised lower from 1.23 million to 1.17 million annualized. Based on what all of the homebuilders have been telling us for months and months, this really should not be a surprise. The consensus estimate was about 1.16 million units annualized.

So is 30,000 homes a huge difference? That represents only a monthly run of 2,500 homes spread out across the US. Inventories of new homes from homebuilders are up at a record 566,000. That is estimated at 6.1 months supply. This number is still high, but it is not like the doctor telling you that you have mesothelioma and you are terminal.

Broken down by region: The WEST was the only good market as it increased 8.2% in the West (AZ,CA,OR,WA). They fell 11.3% in the Northeast (NY, NJ, MA, etc.), 7.9% in the Midwest (MN, IL, OH) and 6% in the South. This number in the South is actually surprising considering that the Texas market is still strong. Some of this may be tied to Louisiana. There are MANY more places for sale that are existing homes and you can easily see many more "For Sale By Owner" signs. That is a clear mark of a weakening market, but is this still all that bad?

Back in the days before free money mortgages and instant online approvals and ridiculous incentives it took a much longer time to sell a home. New communities being built were also much smaller in scale. Now that all the homebuilders seem to be public, it seems the demand from shareholders states that homebuilders have to keep wowing everyone. That isn’t sustainable. Back in the 1950's there were some crazy projections that Chicago would essentially be tied to New York City in one giant megalopolis. If you have ever made that drive, you will know how ridiculous that sounds (besides that, you would have to go through Gary).

The iShares Dow Jones US Home Construction (ITB) are unfortunately too thin to gauge this. Pulte Homes (PHM) already just reported earnings and a more reasonable guidance, and its shares are actually up 1.2% at $30.43. Shares of Lennar (LEN) are up 0.5% at $45.46, but that is 1% under the intra-day highs. Beazer Homes (BZH) had slipped into negative territory but shares are now up 0.4% at $40.68.

The record was 1.41 million annualized last year in August. Sales of new single-family homes closed out 2005 at 1.282 million units, 6.6% above the previous annual record of 1.203 million in 2004. If you compare this current number, the total new homes sold were 976,000 in all of 2002 and only about 908,000 in 2001. Back in the 1990's these were often much lower.

It looks like the market is just learning to adapt with what is a more realistic housing market. It goes without saying that these homebuilders need to take a building breather and focus on their core earnings instead of endless building. That is what the street is telling them anyway.

It is always hard to catch a complete bottom and it is often that sectors which have fallen from grace can take months or even quarters to base out, but it sure feels like these are trying to form a base. Almost every homebuilder has been down 50% from their December 2005 to January 2006 highs. We have seen them base before and then endured them going lower still, so once again it is impossible to say they have definitely bottomed. It just feels as though the market is saying that it has finally tried to price in all the bad news. These won't turn around on a dime, but it is definitely worth trying to do some homework here in this group.

Jon C. Ogg
July 27, 2006

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