This morning, the commerce department reported that new home sales came in at an annualized rate of 858,000 - 23.5% below last March’s figure! This decline is partially offset buy an increase in median sales price of 6.4% since last March. (BTW, incentives are not deducted from the sales price, therefore, margins or profitability may not be moving up in line with sales price.)

Personally, I’m a bit thrown off by the growing disparity between new home starts and new home sales. By my quick and dirty calculations, new home starts have outpaced new home sales by over 151,000 in the last three months! (Starts from Jan thru Mar came in at 371K while sales were a dismal 219K). At this rate, homebuilders would add an additional 600,000 homes to the market in this fiscal year – doubling the current inventory. I realize that home sales are seasonal and perhaps builders are getting prepared for the summer months but the disparity seems extreme.

Investors rewarded the homebuilders when the housing starts information was released last week by pushing my mini-homebuilder index up 6%. [My mini-homebuilder index consists of KB Homes (KBH), DR Horton (DHI), Lennar (LEN), Centex Homes (CTX), Hovnanian Enterprises (HOV) and Pulte Homes (PHM).] Apparently, the market thinks it’s a good thing when you build many more homes than you can sell. With home ownership rates at 70%, an all-time high by a wide margin, who is going to buy all these homes?

Icing on the cake – Earlier in the month, the homebuilders confidence index came in at 33 – it’s second lowest reading since 1991. I can understand industries being blinded by their own success and overproducing, but I’m at a loss when an industry knows sales are going to “suck” (I’m quoting here) but yet they still overproduce. Let’s examine a rundown of the industry

Sales - Down
Confidence - Down
Prices - Flat (I’m discounting for their incentives)
Costs - Up (Check out the CRB Index for support on this)
Inventories - UP
Foreclosures - Shooting thru the roof
New Construction - Flat to increasing

Add it all up and I’m afraid it won’t be long before these stocks start testing their cyclical lows from last summer.

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