| September New Home Sales Defy Expectations |
| Written by Jonathan Smoke | |
| 10.27.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported the preliminary reading of new home sales in September today, and the results surprised many. Economists and analysts had been expecting a decline. After all, Wall Street lost its collective head starting in September, and the recent builder sentiment readings showed continued declines. According to the report, sales of new homes in September 2008 were at a seasonally adjusted annual rate of 464,000, which is 2.7% above the downwardly revised August rate of 452,000. The monthly change was not statistically significant—which means based on the survey technique, it’s not clear if sales were up or down or just plain sideways. The 33.1% decline over September 2007’s rate of 694,000 homes was statistically significant—we know sales are lower now compared to last year. The fact that home sales didn’t decline is significant. Albeit at an anemic annualized pace of 39,000 homes per month, the sales continue to gradually erode inventories. The annualized and real levels of new home inventories fell below 400,000 in September. In the “Ahead of the Tape” column in The Wall Street Journal today, Mark Gongloff echoed the sentiment that new home sales would fall in September. He added that the existing home sales increase announced last week was causing an odd bifurcation in the housing market: “This phenomenon has led to an oddly bifurcated housing market, in which existing-home sales have built a bottom, while new-home sales haven't stopped drilling their way to the center of the earth.
‘New homes have never decoupled from existing homes’ before, as ‘most people that buy a new home have to sell an existing home first,’ says Ivy Zelman, CEO of Zelman & Associates Housing Research. She expects new-home sales of just 410,000 next year, the worst pace in a quarter-century. This decoupling may be because many of the people buying foreclosed homes—maybe 50% in some markets—are investors. Some will rent the houses until the market recovers, further hurting demand for home purchases. Until new-home sales find their own bottom, housing won't begin to heal.” Even though many analysts don’t want it to, healing has been happening as inventories have declined. While they may be right that many foreclosure buyers are investors, new homes offer a value over and above existing homes and certainly foreclosed homes. Buyers who are looking at 5 to 30 years of ownership care about warranties, energy consumption and new amenities. So as long as there are real buyers and new home pricing is in line with existing homes, new homes will sell. And the pricing data uphold that new homes remain competitive as prices continue to show declines—the median price of a new home in September was $218,400 while it was $220,400 in August. Further, it is possible for the pace of sales for new homes to decouple from the pace of existing homes. The chart below plots the annualized monthly pace of new home sales in blue on the left axis and the monthly pace of existing single family homes in red and on the right axis. Different axes were used to make an easier comparison.  Over the history of data available for these two series from 1968 to present, the pace of sales for new and existing homes generally do follow the same path, but the two do diverge or “decouple” on occasion. For example, during the early 1970s we saw new homes outsell (relatively) existing homes. This was a recessionary period featuring the first energy shock. Maybe new homes offered something existing homes couldn’t? Then in the late 1970s and early 1980s, the pace of sales separated again with new homes declining much further. That recessionary period seems a lot like the current one. And again in the early 1990s, during a recession, the pace of new home sales fell far more dramatically than existing homes. It is also interesting to note that during the boom, new home sales took several years to catch up to the existing homes pace. New home sales caught up in 2003 until it all peaked in 2005. So we see that new home sales tend to fall more quickly and further than existing home sales during recessionary periods. Regardless the uptick we saw in both in September was a good signal. If we see it again in October, a clear argument could be made that home sales have made their bottom. 
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