Reducing S&LT Content Makes the Data Bland

• The new home sales data yesterday was severely disappointing with August data revised lower (+3.5% to -3.0%) and September data far worse than expected (-5.5% vs -0.6%).
• Higher interest rates are garnering most of the blame, but this explanation overlooks the changes to S&LT and the mortgage deduction cap. 
• The severest declines were in the Northeast and West. The places with high S&LT content and home prices. 
• If the data for the South does not perk up in the next couple of months, the data will become worrisome.

Unequivocally, the new home sales data released yesterday was disappointing, and it should raise some red flags. The main flag is tax reform had some unintended consequences. And, while widely positive for U.S. businesses, it is not for the U.S. housing market. There are certainly other contributors to the decline in home sales - higher mortgage rates and elevated home prices are undeniably contributors - but they do not appear to be the primary sources of the weakness. In fact, the Midwest saw the median price of new houses sold tick higher, and it was by far the best region in the data. 

While the home sales in the South and Midwest remain off their peaks, there does not appear to be a wholesale breakdown in the new home market. The Northeast and West are a far different story. Peaking in February, the Northeast has seen a 59% decline. The West data topped in November 2017, and currently sits 36% lower.

Why do the regions matter? A couple of reasons. First, the South dominates the data with more than 50% of new home sales, and paying attention to its health is important. At the moment, it appears to be fine, a positive for the data going forward. Second, the regions have different exposures to the capping of S&LT and lowering of the mortgage deduction. The West and Northeast are the most exposed, and the data is showing there are tangible effects. Will the data reverse? Possibly. The Midwest and South are more than 70% of the new home market, and those regions do not appear to be suffering from the S&LT blandness - yet.  

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