Wednesday, June 24, 2009

New Home Sales Vs. Durable Goods

A rosy durable goods report got the equity market off to a strong start this morning. Durable-goods rose 1.8% in May, with non-defense capital goods excluding aircraft rising 4.8%. This report is notoriously volatile (April durable goods were down 2.9%) and nearly impossible to predict, yet economists try and everyone gets excited when the number exceeds expectations.

In a more sobering report of the state of the economy, new home sales were down 0.6% in May to a seasonally adjusted annualized rate of 342,000. Economists were expecting May sales to climb by 2.3% to 360,000. Year-over-year, new home sales were 32.8% lower than the level in May 2008. The median price also fell in May to $221,600, down from $229,300 in May 2008, but higher than April's $212,600. Inventories declined to an estimated 292,000 homes for sale, but this still represents 10.2 months worth of new home inventory.

The bum new home sales report is unlikely to deter the ever-chipper homebuilders, who are busy snapping up land on the cheap. The WSJ reports that homebuilders are buying "cheap" land from banks and other lenders that are unwittingly finding themselves with too much dirt on their hands due to foreclosures. A reasonable person would ask why buy more land when it's already coming out of the homebuilders' ears? Apparently, most of the land that the homebuilders purchased at boom-time prices were unfinished lots in locations far far away from where anyone wants to live or work for the next 30 years or so. Most of the land they are purchasing now for pennies on the dollar are finished lots in relatively decent locations. Can't blame them for dollar-cost averaging. It works in the stock market. Well, maybe not...

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