New Home Sales Decline for Third Straight Month, Likely to Weigh on U.S. Economy

There's no way to sugarcoat: sales of new homes remain at an anemic level -- they fell 0.7 percent in July to a 298,000-unit annual rate, -- a five-month low and a pace which means the housing sector is likely to remain a drag on U.S. GDP growth for at least the next two quarters, and perhaps for longer.

A Bloomberg survey had expected sales of new homes to total a 313,000-unit annual pace.

The median sales price in July was $222,000 down 6 percent from June, but up about 4 percent from a year ago, in July 2010.

One modest bright spot: home inventories totaled a 6.6-month supply in July at the current sales pace -- unchanged from June. However, inventories are still well above healthy levels: a 3- to 5-month supply is considered normal.

Summer Failing to Boost New Home Sales

Further, July's dismal housing data means that despite the arrival of the summer months -- which typically see an increase in activity as many families choose this time of year to move because school is out -- the new home sale market has not revived. At best, it's been statistically flat over the summer: new home sales totaled a 309,000-unit annual pace in May.

Institutional investors follow the new homes sales statistic closely. The reason? Historically, increases in home sales are strongly correlated with increased demand and an economic expansion. That's because housing activity does not operate in vacuum. When new homes are sold, homeowners tend to buy durables goods / big ticket items for the new home: furniture, appliances, home supplies, and lawn/garden equipment -- an uptrend in each of which is good news for the U.S. economy and bullish for the U.S. stock market.

Housing Sector/ Economic Analysis: For investors, the disappointing housing sector data is bad news for the stock market. Low or tepid new/exsiting home sales generally suggests weak demand conditions are likely to prevail in lateral sectors (such as appliances), which historically has weighed on the stock market. And the third straight monthly decline in new home sales from a low base certainly qualifies as a weak housing sector.

For prospective home buyers, a buyer's market remains in force, but be certain to research your market carefully: in selected U.S. metro areas, home prices are low, but in six months to a year, they could be substantially lower. In other words, for buyers, in many markets, time is on your side.