U.S. Housing Market: New Home Sales Decline Has a Silver Lining

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Another comforting sign for the U.S. housing market come today (Friday) as new home sales data for January exceeded forecasts, another bullish sign for home improvement-related stocks like The Home Depot Inc. (NYSE: HD).

New home sales in January fell 0.9% to a 321,000 annual rate. That pace is down slightly from the 324,000 pace set in December, but sales beat the expected rise of 315,000, according to a poll by Bloomberg News.

December sales were previously reported at 307,000 but were revised upward. Total 2011 home sales hit 304,000, down 5.8% from 2010.

But the dip in numbers isn't a bad sign.

"Don't read anything into the 0.9 per cent month-on-month fall in new home sales," Paul Dales, senior US economist at Capital Economics, told The Financial Times. "Sales only fell because December's estimate was revised up from 307,000. If all the revisions were concentrated in January, then sales would have risen by 8.1 per cent month-on-month. Moreover, sales are now at a level not seen for two years."

The supply of homes on the market fell to 5.6 months' worth – the lowest since January 2006 – compared with 5.7 months in December. The median price for a new home rose 0.3% to $217,100.

So what does all this mean?

"It's another sign the housing market is reaching a bottom," said Money Morning Global Investing Strategist Martin Hutchinson. "With building activity and builder confidence increasing, and mortgage rates close to record lows, the trajectory is clearly upwards."

New Home Sales the Latest Positive Data

New home sales are calculated when buyers sign contracts. They previously forecast results for the entire housing market, but buyers have opted for previously-owned homes more than before which has made existing home sales more important.

The good news is that existing home sales are up. Existing home sales for January rose 4.3% to an annual pace of 4.57 million units.

Also, existing home sales inventory is down. The inventory of existing single-family units has fallen by 950,000 units from August 2010 to January 2012. Sales of existing single-family units have climbed 800,000 over the same time period.

Finally, the National Association of Home Builders said last week its gauge of builder sentiment about single-family homes rose to its highest level in more than four years. The index hit 29 in February, up from 25 the previous month.

While home prices will remain low as more of the "shadow inventory" – homes locked up in foreclosure battles – start going up for sale, houses still are moving off the market.

The fact that new home sales as well as existing home sales rose shows us there are more available buyers who want to invest in a new home. All this means more consumers will be interested in purchasing furniture, appliances, and materials for home improvement projects.

This housing market trend is creating an investment opportunity in certain industry-related stocks.

New Home Sales Will Boost Stocks

The iShares Dow Jones U.S. Home Construction Index ETF (NYSEARCA: ITB) is up 15% this year and 31% over the past three months.

"A gradual uptick in new home sales makes homebuilding stocks attractive, provided they're concentrated in mid-market housing away from the markets with the biggest repossession rates," said Money Morning's Hutchinson.

U.S. homebuilder D.R. Horton Inc. (NYSE: DHI) is up 12% so far this year. Horton saw net home orders rise to 3,794 in the last quarter of 2011, up from 3,373 the previous year.

Also getting a boost from the stabilizing housing market is Beazer Homes USA Inc. (NYSE: BZH), up about 33% so far this year. Beazer said new home demand rose 36% last quarter and new home closings climbed 60%.

The Home Depot Inc. (NYSE: HD), the world's largest home improvement retailer, reported Tuesday better-than-expected earnings for 2011's fourth quarter. Net income rose 39% to 50 cents per share. Net sales rose 5.9% to $16 billion compared with $15 billion in the same period a year ago.

HD stock has climbed about 12% in 2012 and 26% over the past year. It also increased its annual dividend to $1.16 – a 2.5% yield.

Home Depot expects continued housing market stability and new home sales to help boost store sales by 4% in 2012, and earnings per share to rise 13%.

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