Interest Rate Roundup

Wednesday, November 29, 2006

My thoughts on new home sales

I'm done slicing and dicing the new home sales report from the Census Bureau. Like the existing homes report, it’s a mix of “the good, the bad, and the ugly” ...

* Sales fell to 1.004 million (at a seasonally adjusted annual rate), down 3.2% from September’s 1.037 million and down 25.4% from last October. The market was looking for a 0.2% decline, so this would be the “ugly” news.

* Pricing was a real shocker – the “good” news on its face. The median price of a new home ROSE 1.9% to $248,500 in October from $243,900 a year earlier. In fact, this is the highest since April.

* Inventory was at 558,000, down slightly from 562,000 in September. But it’s still only 1.4% off the all-time high in July. Moreover, the “months supply at current sales pace” rate climbed to 7 from 6.7 in September. I’d call this the “bad” news.

Before I go into more details on my analysis, let's talk about the caveats first -- 1) New home sales data is notoriously more volatile than existing home sales data. 2) It also fails to capture the impact of cancellations – buyers of new homes who back out of contracts because they can’t sell their old homes or have just decided to walk away. 3) The new home market is much smaller than the existing home market. All of that said, this data is more TIMELY – it’s based on contract signings, not closings. So it’s not like it’s useless.

What I see is this: The only real way new and existing home sellers can move inventory in this market is to cut prices. Reason: There is so much inventory out there, that buyers have almost too many homes to choose from. Look at what happened in October -- Existing home prices fell, so sales ticked up. New home prices rose, so sales fell more than expected.

With the combined inventory of new and existing homes just shy of this summer’s all-time high, it is imperative that sellers are realistic. While purchase mortgage applications and sales rates are bouncing around recent lows – rather than declining further -- they’re certainly not surging. Throw it all together and I think we’re looking at an extended period where the market is relatively weak -- sales will be uninspiring, inventory will remain high, and prices will be flat to down through 2007 at least.


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