Analysis: HD

On Tuesday, shortly after the opening bell, the U.S. Census Bureau reported that new home sales in December increased 3.7% month over month to a seasonally adjusted annual rate of 621,000. The reading topped expectations of 600,000, however, serving to more than offset the beat, November's reading was revised down to a rate of 599,000 (from 657,000, previously reported). With the December's reading, on a year-over-year basis, sales are down 2.4% from December 2017's estimated rate of 636,000.

It is also worth noting that of the 621,000 new homes sold during the period, 213,000 have yet to begin construction, while 179,000 remain under construction. Recall, looking at the stage of construction can be helpful for two reasons. First, it can indicate additional work to come for labor forces tied to the home building market and second, it can point to the potential for additional sales to come for those companies that supply building materials for new homes, such as our newest portfolio addition, Home Depot (HD) .

Digging deeper, month over month, while sales fell 15.3% in the Midwest (-3.2% YoY), the decline was more than offset by a gain of 1.4% in the West (-23.9% YoY), 5.0% in the South (+7.4% YoY) and a 44.8% surge in the Northeast (+16.7% YoY).

As for costs, the average selling price in December pushed to $377,000 (from $357,600 in November). The median sales price also increased, swelling to $318,600 (from $303,500 in November).

Given the current supply of new homes for sale, which at the recent pace of sales on a seasonally adjusted basis, sits at 6.6 months, we would not be surprised to see average prices hover at current levels, or pullback as supplies have now been at or above the six-month level many consider to be balanced between supply and demand for seven consecutive months.

We continue to believe the housing market, which we reiterate tends to punch above its weight due to its influence on various other sectors of the economy such construction, associated services subscription and expenditures (think internet, utilities, etc.) is showing cracks in the U.S. economy. And while the U.S. economy continues to expand, a view we have increased confidence in following a better-than-expected 4Q18 GDP release and this morning's robust NMI reading, we maintain the view that Fed must hold pat to its dovish commentary and that Washington must broker a deal with Beijing in order for the market to make a play at new highs.

Bottom line, while readings like GDP (which is heavily impacted by consumption) and this morning's ISM Non-Manufacturing release, which contained positive commentary from several industry sources, give us confidence in the power of the consumer, the housing market remains a point of weakness that we will continue to monitor. That said, we believe the recent change in Fed stance, which has indirectly resulted in a reduction of mortgage rates, could help offset the high prices and give the sector a much needed boost as buyers look to lock in the lower rates.

For members interested in digging deeper, please see the official release, here.