New Home Sales Fall to Six-Month Low - Housing's Summer of Discontent

There's no way to the sweet talk it -- sales of new housing remain at an anemic level -- they fell 2.3 percent in August to a 294,000-unit annual rate -- a six-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 longer.

A Bloomberg survey had expected sales of new homes to total a 294,000-unit annual pace.

The average sales price in August was $246,000 down 7 .7 percent from July, and also down 8.6 percent from a year ago, in August 2010.

The median sales price in August was $209,000 down 8 .6 percent from July, and also down 7.7 percent from a year ago, in August 2010.

The only modest bright spot -- an it's more of a neutral stat than a positive: home inventories, which totaled a 6.6 month supply at the current sales pace -- unchanged from July. However, inventories are still well above healthy levels: a 3- to 5-month supply is considered normal.

Further, August's dismal housing data means that despite the summer season -- 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 statistically flat: 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 - 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 housing sector's continued doldrums is bad news for the stock market. Low or tepid housing starts 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 fourth straight monthly decline in new home sales from a low base certainly qualifies as a weak market. New home sales need to return to the 400,000 to 600,000 range, with more-normal inventories of roughly 3 months, to firm median prices and give the U.S. economy the boost from the housing sector that it needs.

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.