US New Home Sales Unexpectedly Plummeted in February to their Slowest Pace on Record

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, March 24, 2011

03/23/11 - U.S. new home sales plunged for the second straight month, plummeting 16.9% in February to 250,000 annualized units. This amount represents the slowest pace of sales since recordkeeping began in 1963. The sharp monthly decline comes as a surprise as market expectations were for a modest 2.1% increase. Somewhat more positive is the fact that upward revisions were made to the previous three months, with last month’s sharp decline revised to a smaller 9.6% drop to 301,000 (initially reported as 284,000 units), while the increases seen in December and November were revised up to gains of 16.4% and 2.1% from 15.7% and 0.4%, respectively. The sharp falloff in the pace of sales combined with an unchanged number of homes available for sale to push the months’ supply of unsold new homes up to 8.9 from 7.4 in January.

The weakness in new home sales in February was broad-based as sales declined sharply in the Northeast (-57.1%), Midwest (-27.5%), West

(-14.7%) and, to a lesser extent, the South (-6.3%).

The absolute number of new homes for sale was unchanged in February at 186,000, marking the thirteenth consecutive month in which inventories either held steady or decreased. The 186,000 level is the lowest number of new homes available for sale since November 1967. The jump in months’

supply moves it further from the series’ long-term average of 6.1, although it remains below the recent peak of 12.1 seen in January 2009.

Prior to today’s report, evidence of a modest upward trend in new home sales was starting to appear as the three-month moving average had edged higher in each of the last three months and reached a seven-month high in January. Indeed, the perceived improving market conditions for new homes prompted a reported increase in homebuilders’ confidence this month to a 10-month high as more firms expect stronger sales in the near term. Today’s dismal report, however, once again highlights the concern that a recovery in the housing market has yet to be sustained as the series set a new record low. There are not even any special factors to speak of that would account for the reported plunge, as new home sales are recorded at the time of signing, meaning that the drop off associated with changes to state building codes would have predominantly been seen in January, as would significant drop-offs related to adverse weather conditions seen in that month. This data series has exhibited extreme volatility on a month-to-month basis during the past year, so it is highly possible that this outsized decrease could be unwound in the coming months. Overall, we expect the level of activity in the housing market to remain at depressed levels for the near term, and we anticipate that residential investment will continue to be fairly subdued and provide only a small contribution to overall economic growth in 2011.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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