The Truth Behind New Home Sales

Last Wednesday, the Census Bureau released new home sales and it wasn’t good news, but there’s just a little more to it than that.

The nation saw 23,000 new home sales in December 2008, down 48% from December 2007. The last time this country sold 23,000 new homes, Lyndon Johnson was in the White House. We've never sold fewer homes. Or, at least not since the Census Bureau started keeping this statistic (1962). The average number of new homes sold per month in that time period was 58,000. Keep in mind that we just sold 123,000 homes in March of 2004.

In short, these numbers are terrible. But this number is not seasonally adjusted. Few people buy homes at all in the winter months, let alone December. However, the seasonally adjusted number was just as bad. Each of the four geographic regions was down from November.

As one might expect with all-time low sales numbers, the median new home price dropped to multi-year lows. Over the previous twelve months, prices fell from $227,000 to $206,500, down 9.7%. Actually, given the lack of demand for new homes, a year-over-year drop in price less than 10% can be viewed as a relatively positive.

Here's where the analysis will differ from what you'll hear on CNBC: We don't like the way the Census Bureau figures inventory. To figure out the number of months' supply in inventory, they divide the number of unsold new homes on the market and divide by the current monthly rate of sales. That probably sounds fair enough to you, but the current sales rate is below average by a substantial amount. On the other hand, this entire glut is the result of basing construction plans on an unsustainably high sales rate. The current existing supply of homes in inventory is 359,000. That's down from the December 2007 level of 496,000 homes. Clearly the inventory is coming down. However, the way the Census Bureau figures months' supply, it looks like inventory is skyrocketing because they use the current rate of monthly sales. That methodology would have us believe inventories are up 66% since May, to an extremely high level of 15.6 months! That distorts the real picture - inventories are coming down.

The workaround is simple - divide the current inventory by the average monthly sales. Since this statistic began in 1962, we've averaged 57,700 new homes sold per month. If we use this rule of thumb, we find that when sales return to normal levels, we've got 6.22 months of new homes in inventory.

Like we’ve said before, when we have a combined inventory, between new and existing homes (which we’ve adjusted as well), of 12 months or less, the housing market will start to heal. If we use month's supply figures that reflect average home sales rather than current (and historically low) sales rates, the picture looks less bleak.

In fact, it looks like the housing market is getting ever closer to a point where it can stabilize, heal, and ultimately grow again. And remember, this is before any type of stimulus. Call us crazy, but it looks like the free market is working just fine. It's just going to take time.

Comments

[johnnybigsp...:]

this article is not negative enough to be published on SA. you forgot to add the part about the impending doom of our nation. :-P

seriously though, thanks for pointing that out. I wish common sense like yours had a voice as loud as the doom and gloomers.

Feb 02 12:38 PM

[Steven Hansen:]

"In fact, it looks like the housing market is getting ever closer to a point where it can stabilize, heal, and ultimately grow again."

Patrick, your discussion was on new home sales - and i agree with the thrust of your argument. this market is healing itself by dropping prices - and by reducing to historical low levels new housing starts.

however, until the housing prices stabilize - nothing will be healed. the main issue is not backlog but price.

Feb 02 10:42 PM

[Guero:]

Where is the discussion of foreclosure inventory in this article? If you are not accounting for foreclosure inventories then this article may be moot. I know I know, this is an article on *new* homes, but whether or not homebuilder CEO's like it, they are competing against foreclosures. Not to mention sellers willing to do a short-sale, of which there are many.

Feb 03 03:42 PM