New home sales growth maintains momentum in September
New home sales increased 5.7% to 389,000 in September, with some downward revisions to prior months’ reports. While the pace of sales is still below the roughly 420,000 peak range during the tax credits, new home sales has clearly embarked on a recovery path. With revisions in place, Deutsche Bank believes that the recovery in new home sales began in earnest in early to mid 2011.
Year/year growth pace of 27%, implies normalization by late 2014
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If one puts aside the mammoth September housing starts report, the year/year pace of new home volume growth has been 25-30% recently, and September new home sales falls within this range at 27%. If the housing market sustains 25-30% growth rates, housing starts would hit a 1.4 mm pace within two years (late 2014) and new home sales would hit a 700,000 pace.
Builders’ optimism showing up in inventory turnaround
Since last winter, single-family starts growth has slightly outpaced new home sales growth. At first, this outperformance was driven by warm winter weather; however, since then it is likely to have been fueled by a growing optimism about housing recovery. This has shown up in a pickup in new home inventories in recent months – the first since the housing downturn began. The increase is small – from 142,000 to 146,000; nevertheless the inflection point is notable.
Extrapolating 25-35% growth rates is a risky proposition
While the housing recovery is for real, Deutche Bank thinka investors may have become too optimistic in projecting recovery. In their view, investors are likely projecting an uninterrupted continuation of current growth rates, if not a slight
acceleration to 30-35% growth rates. Growth is likely to continue in the nearterm; however, there are risks to longer-term projections. Apart from risks to job growth, they don’t think enough land development is happening to support an uninterrupted growth trajectory. Also, some legacies of the housing bust – impaired household credit and a hobbled mortgage market – are likely to persist even as housing recovers.