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US New Home Sales: Can you smell recession?

Written by A Forex View From Afar on Monday, January 28, 2008

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We still don't have any good news out the US. Today was the time for New Home Sales release to disappoint us.
Markets expected 645k, but the numbers came in poorer, 604k, having a 4.7% drop Month over Month. Here you can check them out, at TheLFB.com calendar

Forex markets didn't look too impressed with these numbers, why would they? All day long we have negative numbers shooting out of the US and it seems the equities markets are leading the dance for now...so who is actually interested in those silly numbers? We are, because we can't just ignore the facts.

Even if trading should be boring, now we'll go to the fun part of forex trading...spotting a recession. The inventories of single family houses will be depleted in 11.7 months (not seasonally adjusted) at the current sales level, the Census Bureau tells us. We can see it in the chart.

click for larger view

Recognize the green shaded areas? They all are recession periods, when the house inventories would be depleted in 10 months or more.
Out of the last 6 periods, only twice did the inventories go above a 10 months period. Those 2 recessions are in 2001, the consequences of Y2K and the dot com Bubble, and 1970 that was mainly blamed on the gold-standard inflation. In the rest of 4 recessions, the inventories period went above the 10 month benchmark, but didn't stay too long there; the longest period was 5 months.
We are now 2 months above this 10 months benchmark, so in all of this there is a good sign that things can change.

It's very interesting that almost every time that these inventories went up, the US entered in a recession.
During the famous '87 market crash, the period to sell the house inventories also skyrocketed.

Please, add this fact to the list of reasons why we're heading to a recession.

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