New home sales for December came in significantly higher than anticipated at 10.8% where an increase of 2.0% was expected. Sales were revised downward for November to 1.9% and October to 5.5%. The annual rate of change accelerated to 9.9% from 9.4% in November. The level of sales rose to 544,000 from 491,000 in November.
Regionally, the pattern of new home sales was as follows: up 31.6% in the Midwest, up 21.0% in the West, up 20.8% in the Northeast, and up 0.4% in the South. The number of months' supply of new homes fell to 5.2 months.
This was quite a strong monthly increase in new homes sales, the largest monthly change since August 2014. Sales were also strong across just about all the major regions and importantly the level of inventories also moved lower. There has been a dramatic reduction in the level of inventories for existing homes, which should continue to drive growth in both starts and new home sales. Some of this strength could be related to the increase in interest rates that took place in December and the anticipation of more to come—mortgage applications have also been exceptionally strong. In general, we continue to see relatively decent fundamentals for the housing market, including rising incomes, a strong labour market, decent levels of consumer confidence, and homebuilders that continue to report their biggest constraint as being a lack of available land upon which to build, rather than demand for homes. Our concerns are related to the current financial market volatility, which is related to the ongoing slowdown and credit deleveraging taking place in many emerging markets. So far, U.S. consumers do not seem to be particularly phased by these developments, though the danger is that some of this weakness becomes self-fulfilling.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.