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| New Homes Sales Slowly Improve |
| Written by Jonathan Smoke | |
| 11.30.2007 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported yesterday that new-home sales rose 1.7% in October over September as the median price of a new home in October was down 13% from the prior year.  Imagine that—economics 101 was right. If demand falls, the sure fire way to increase sales or keep them at the same level is to lower prices. Builders have done that significantly in 2007, so despite a dramatic fall in demand caused by a lack of confidence and limited credit, new home sales are slowly pecking away at inventory levels.At the same time, existing home prices haven’t changed much in the majority of markets. Moreover, existing home prices haven’t fallen enough to maintain the previously brisk level of sales. But builders, acting on their own incentives to survive and do whatever is necessary to generate cash flow, have reduced prices at least enough to keep new home sales at a historically respectable level. The above chart depicts the monthly annualized sales for new and existing homes using two different axes (new homes on the left and existing homes on the right). You can easily see that new homes are slowly improving while existing homes are in a steady decline. 2008 is likely to see more of the same. Builders will continue discounting and making sales so the months’ supply of new homes will fall. And as soon as consumers see prices stable AND credit conditions improve, the pace of sales will increase to help reduce inventories. Meanwhile, existing home sales will decline as new homes are simply a better bargain and alternative in most markets. Forced sales, such as those through foreclosures and relocations, will cause fewer existing home sales to trade at lower prices. And until prices stabilize, existing home inventories will not improve. 
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