Housing was one of the culprits of the last recession. As such, various housing reports have played critical roles in helping gauge when the recession bottomed out and the strength of the recovery. Housing has been improving the past couple of years. The month-over-month and year-over-year reports have often been staggering, but it is important to keep in mind the depth of the plunge. It is much easier to show a large percentage improvement when recovering from levels that were a fraction of their former selves.
With this background of easy comparisons, coupled with the start of the spring selling season and pent-up demand due to the harsh winter, the March decline in new home sales came as a shock. Earlier today, the Commerce Department announced new home sales plunged 14.5% in March versus February levels. The year-over-year drop was also staggering, falling by 13.3%. This was the worst monthly drop in eight months, and the worst 12-month change since April 2011.
The seasonally adjusted rate of 384,000 for March marked the second consecutive month of declines. Furthermore, economists were caught completely off-guard, as they were projecting a 2.3% increase to a pace of 450,000 units per year.
Some analysts blame higher prices and lack of inventory as the reasons for the sales shortfall. However, new home inventories are actually at their highest level in more than three years. They increased by 3.2% for the month to 193,000 units. This figure is well above the July 2012 low, while still less than half of pre-recession levels.
The two home construction ETFs peaked in late February and have been trending lower ever since. SPDR S&P Homebuilders ETF (XHB) is off about 8%, while iShares U.S. Home Construction (ITB) fell closer to 12%. The reason for this discrepancy is that ITB has nearly two-thirds of its assets in the hard hit homebuilders industry. Meanwhile, despite having homebuilder in its name, XHB has only about 26% allocated to home building firms. The remainder of the portfolio includes companies primarily involved in building products, home furnishings, appliances, and home improvement retailers.
Homebuilder stocks are part of the broader Consumer Discretionary sector, although they represent only about 1% of it. Still, housing is often considered a bellwether of consumer discretionary spending activity, and therefore, can influence the action of other industries in the sector.
Energy climbed to the top this week. Energy was the lowest ranked sector and was registering negative momentum back on February 12. Its eight-week ascent was far from flawless, but it accomplished the task nonetheless. Utilities eased off to second place, ending its five-week reign in the leadership role. Real Estate held steady in third place and is holding up well today despite the disappointing new home sales report. Consumer Staples began to climb a couple of weeks ago when the market looked shaky. Additionally, it was able to hold fourth place and boost its momentum this week when the market headed upward. The seven remaining sector categories also maintained their same relative order. Financials, Technology, and Health Care were successful in reversing their negative trends. Consumer Discretionary has occupied last place for the past five weeks and shows no signs of relinquishing that dubious position.
The style rankings are exhibiting the same characteristics as the sector rankings this week. Namely, the top two categories swapped positions while the nine lower-ranked ones kept their same relative order. Large Cap Value is now the highest ranked style after being next to last only five weeks ago. It was in second place last week with nearly the same momentum reading as Mid Cap Value. This week, the roles are reversed, with Large Cap Value only fractionally better. Mid Cap Blend, Small Cap Value, Large Cap Growth, and Mid Cap Growth all saw enough improvement to put them back on a positive course. The three bottom categories are still in the red, although they significantly reduced the magnitude of the negative readings.
Latin America holds the top global ranking for a fourth week. It had a rapid ascent in the last half of March, posting three back-to-back weeks of impressive gains. It has been digesting that advance by moving mostly sideways yet has been able to hang on to the top spot. Pacific ex-Japan has been closing the gap between itself and Latin America and is on pace to overtake it soon unless Latin America resumes its rally. In addition to Latin America and Pacific ex-Japan, Emerging Markets also kept its relative ranking intact. Europe moved ahead of Canada, and EAFE climbed a spot to sixth. The U.K. climbed two positions to claim the title of most-improved category this week. China failed to participate fully in the global rally, causing it to lose momentum and two spots in the process. China is now on the verge of joining Japan in negative territory. Despite the improvement for the U.S., it still lags behind most of the world.
“The weak tone of this report is a bitter pill for those, including ourselves, who have been looking for signs of a spring thaw in the housing recovery.”
Millan Mulraine, deputy chief economist at TD Securities, April 23, 2014
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