Sales of new homes dropped sharply in January, contrary to economists’ expectations. Sales dropped 11.2%, the Commerce Department reported recently.
Seasonally adjusted sales came in at an annual rate of 309,000 houses. This is the lowest sale rate for new houses going back almost a half of a century. Economists expected sales of new homes to come in at about 360,000 houses.
Many are declaring shock at the new number. I do not see it that way. Here is why.
First, as we know and I explained in a recent article, short home sales are up sharply. Those are foreclosed or repossessed houses where the lender is willing to sell them for less than the value of the earlier underlying mortgage loan. Banks and other lenders are discovering that it is expensive to maintain and keep homes in good condition and they are becoming more eager to get these problems off their books. That is why short sales are up so sharply. However, as might be expected, increased short sales can and have cut badly into the sales of new homes. Often, too, by going directly to the lender, larger brokerage commissions can be sidestepped.
Consider the possible implications. Mr. X buys a two year old home at the edge of what he can handle in terms of his income post crash. He makes a 20% down payment because that is what the lender requires, given his income situation. He then almost immediately loses his job. The home is foreclosed upon and after a several months of maintenance costs and trying to sell it at a higher price, the lender decides to unload the property and is willing to take a price equal to 10% off the balance due from the earlier buyer (the average drop on a short sale is now 9%). The house price is now down almost 30%. Buyers become seriously interested, especially if they can go directly to the lender and bypass a brokerage fee. Why pay retail and buy a new home in these or similar circumstances?
Next and in passing, I suspect that there is considerable “noise” in the current figure. When data come in substantially off consensus expectations there usually is, especially when other variables – like short sales sharply up – can help explain the variance. Too, as David Crowe, chief economist of the National Association of Home Builders, said:
In the consumer's mind, the economy is still very ill, and they'd like to see better overall signals from the economy in general and the employment market in particular before they move along with such a significant purchase.
Consumer confidence in the economy has been slacking off a bit. In part, I suspect this is due to the Fed beginning to curtail some of its support for the secondary mortgage loan market, as it now focuses, perhaps prematurely, more on developing its monetary exit strategy.
In these circumstances, why rush to buy a new home if you think there is a reasonable likelihood you can get a good, equivalent home from another source in the future at a lower cost? Lower consumer confidence and the increase in new jobless claims all point to increased caution among home buyers, especially those who are thinking about paying retail for a new home instead of looking for a good short sale deal to protect themselves.
Disclosure: None relevant
