Over the last two days we have been making the case that a housing bottom is forming, but it’s a case of “Government stimulus vs. Gravity.” Today, gravity is gaining momentum as government stimulus may be waning.
Sales of new homes in the U.S. dropped in December; the number of homes purchased declined 7.6% to an annual pace of 342,000, the lowest sales pace since March 2009. For all of 2009, sales dropped 23% to 374,000, the lowest level since records began in 1963.
Part of our bullish call on housing in 1Q09 was based on the fact that the government was coming to the rescue of the real estate industry by providing enormous support to consumers wanting to buy a new home. Not surprising, as the sales of news home began to take off in 1H09 housing prices (as measured by the Case-Shiller home price index) began to improve sequentially; though still declining year-over-year.
Yesterday’s Case-Shiller data, which is a lagging data point, showed that sequential home price momentum is starting to slow. On top of this, we have now seen new home sales decline 9.3% in November and 7.6% in December. It would only make sense that price support will wane further.
As we head into 2Q10 we are starting to get incrementally concerned as we will be lapping the not as easy comparisons from late 1Q09/2Q09, particularly as gravity takes over from government stimulus. This concern is reflected in our portfolio; we are short Toll Brothers (TOL).
Howard Penney
Managing Director
