7/8/2010
By David Urani, Research Analyst

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It's early into July and we have now received the final week's worth of mortgage application data for June. Ergo we are taking this time to look into the crystal ball and hash out our forecast for June new home sales. To briefly recap the latest developments, home sales crashed immediately after, and ever since, the expiration of the nationwide homebuyer's tax credit. New home sales in May dropped by 33% according to the Census Bureau, and pending sales of existing homes fell by 30% according to the national Association of Realtors. Both readings hit their lowest levels on record (New Home Sales records began in 1963 and the Pending Home Sales Index began in 2001).

At this time, we already have a good picture of what the June results will look like as we look at two leading indicators for home sales. Firstly, mortgage purchase applications generally fell down a step for the four weeks ended July 2 as compared to the previous four weeks. For the week ended June 4, purchase applications hit an index reading of 177.3, marking the lowest level since 1997, and the most recent reading of 178.1 for the week ended July 2 was the next lowest level since. By comparison, the four weeks ended May 28 averaged a reading of 225.6. 

Secondly, the pace of decline for lumber futures has been quite similar. After hitting a year-to-date peak in mid-April at $336.80 per contract, lumber futures averaged $257.4 in May and then $211.1 in June. It's a grim look into the dwindling demand for building materials as home sales plummet and foreclosure inventory remains bloated.

Both mortgage purchase applications and lumber futures have been consistently following the trends for new home sales as you can see in the chart above. Consequentially, it is clear home sales continued to decline in June and, thus, the June reading for new home sales is sure to show yet another record low, unfortunately.  We are predicting an annual rate of 285,000 for June new home sales, or a decline of 5% from May. So now you have an idea of what to look for, about two weeks before the official release on July 26. We advise keeping clear of homebuilders' stocks.

David Urani
Wall Street Strategies