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| Rise in New Home Sales Not Surprising |
| Written by Jonathan Smoke | |
| 10.25.2007 | |
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Discuss this article on the forums. (0 posts) The Commerce Department released the preliminary new home sales data for September today along with revisions to the previously reported August sales. New home sales in September increased 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 in August. Previously the August rate of sales had been reported as 795,000. I must make the obligatory comment about the reliability of these figures. This is survey-based data, and the numbers have a wide margin of error, a high likelihood of revision, and do not reflect closing or even sales net of cancellations, which builders have reported are increasingly on the rise. But I am not surprised by them. As I mentioned in yesterday’s post on existing home sales, our analysis indicates that builders have entered into a full-fledged pricing war against new home competition and the increasingly more relevant existing home substitution threat. Builders are discounting to keep sales at the current levels until they can successfully clear more of the inventory. Based on the revised numbers, the months’ supply of new homes spiked in August to just under 9 months. But with big incentive programs in play, inventories fell down to 8.2 months of supply in September.  Inventory levels are a drag on performance and tie up precious capital needed to keep the business running, so builders of all sizes are incented to reduce inventories, and builders have been hard at it throughout all of 2007. I’d say the slight improvement and lack of growth in inventories are proof that their discounting programs are working. Let’s take a moment and give the builders credit for responding to market conditions. After all, as I have pointed out before the level of sales we are seeing is actually relatively healthy from a historical perspective. And, builders have been able to do this despite the turmoil in mortgage credit. So while the price per square foot of a new home has fallen dramatically in 2007, the same measure of existing homes is stubbornly holding in most markets. Builders will continue to make progress on reducing new home inventories as long as they can afford to keep this discounting up and as long as permits and starts continue to fall. And so far starts and permits have fallen dramatically. We expect starts and permits to continue to fall until new home inventories stabilize at a lower level—perhaps around a 6 months supply, which is more of a historical norm. Capital is currently too precious to permit and start new construction in the face of inventories and intense competition from new homes and existing homes. As we’ve shown in recent articles from our Neighborhood Insights pricing information, builders are discounting heavily to move inventory, so I would expect sales to continue at the levels we are currently seeing as long as builders discount as they have been. This means that builders are in a full fledged pricing war against each other and against existing homes. The war will be won by the financially fittest and the builders with community and plan offerings that have the greatest appeal relative to existing homes. 
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