Interest Rate Roundup

Friday, January 26, 2007

The skinny on new home sales ...

New home sales just hit the tape. They show …

* A gain in the monthly sales rate of 4.8% between November and December. That’s well above the forecast of a 0.5% increase. However, sales are still down more than 11% year-over-year.

* The Seasonally Adjusted Annual Sales rate came in at 1.12 million units vs. an upwardly revised 1.069 million units in November

* There were 537,000 homes on the market in December, down 6.3% from the peak of 573,000 in July. That’s good for a 5.9 months’ supply at the current sales rate. However, inventories are much, much higher than at any time in U.S. history (up 5.5% from a year ago and up 74% in the past five years)

* Prices remain relatively weak – down 1.5% year-over-year to $235,000 in December. That’s the third time in the past four months prices have declined YOY.


I expected the official, new home sales to look decent, given the roughly three-quarters of a percentage point decline in 30-year fixed mortgage rates from July through early December. The aggressive use of incentives by new home builders helped as well. Builders have been showering buyers with everything from free pools to mortgage buydowns to price cuts of $100,000 or more.

But there are a couple of major problems with the new home sales figures:

First, they do NOT take into account the impact of cancellations. When a home buyer signs a contract to buy a new house, it’s recorded as a sale. The official tally of homes for sale also drops by one. But if that buyer walks away from the contract, his property is not added back to the inventory count. And in recent months, home builders have been reporting extraordinarily high cancellation rates. One condo and single-family home builder that’s active here in Florida – WCI – actually reported net NEGATIVE orders … gross orders of 261 were wiped out and then some by cancellations of 270.

That’s an extreme example. But based on the cancellation rates public home builders have been reporting (30%, 40% or more), REAL sales are clearly lower and REAL inventories are clearly higher than the government’s numbers show.

Second, there’s the weather. December was an extraordinarily warm month and that probably distorted the sales gains. Just look at the regional breakdown of sales – sales were down 4.4% MOM in the West and virtually unchanged (up 0.3%) in the South, the regions unaffected by the warm weather. On the other hand, sales were reported UP 26.6% in the Midwest and UP 27.3% in the Northeast.

The new home market IS doing better than it was this summer. But this will be a long road to recovery. 2007 should be another relatively weak year for sales and pricing. After all, homes are still relatively unaffordable, especially with the recent rise in mortgage rates. And real, new home supply remains higher than at almost any time in the past 40-plus years. Buyers – you’re in the driver’s seat!


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