Thursday, October 25, 2007

New Home Sales Are Up In September, But Are Things Really Improving?

According to the US Dept. of Commerce as reported by Market Watch new home sales are up in September compared to August, however, the new home sales reported in the previous three months were revised downward. Before everyone gets excited about a turnaround in the housing market new home sales only represents about 15% of the total home sales market and the sale of existing homes was down significantly in September (see previous post from yesterday). In addition, new home sales are down 23% from the same time last year. So you can take comfort in the fact that not much has changed in the last few months, the housing market continues to crash and we are moving into the slow time of the year. Text in bold is my emphasis and if its in color that means I think it is of special interest.

Sales increased 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 in August, an 11-year low. Previously, August's sales had been reported at a 795,000 pace.

The three previous months were revised sharply lower, which means the housing market was much weaker in the middle of the year than previous believed, and no one believed it was strong.

"The crash continues," wrote Ian Shepherdson, chief economist for High Frequency Economics. Sales fell at a 35% annualized pace in the third quarter, he said.

The large revisions highlight the low confidence that government statisticians have in the monthly report and the frequent large revisions it undergoes. Longer trends do a better job of showing the reality of the housing market than volatile monthly numbers.

Sales of new homes are down 23.3% in the past year. The sales figures do not account for canceled sales contracts, which have surged in recent months, especially since the seizing up of some mortgage markets. Many buyers are unable to find financing at the rate they want.

Inventories of new homes on the market fell 1.5% to 523,000, representing an 8.3-month supply, down from 9 months in August. The inventory of completed homes continued to rise, however, new construction on single-family homes has plunged 31% in the past year, according to a separate report released earlier.

Sales rose in two of four regions in September, with sales in the West rising 38% after a 23% drop in August. Sales fell 19.5% in the Midwest to the slowest pace in 16 years. Sales dropped 6.6% in the Northeast and were essentially flat in the South, rising 0.5%.

The government cautions that its housing data are subject to large sampling and other statistical errors. Large revisions are common. The standard error of 10.3% is so high, in fact, that the government cannot be sure in most months whether sales rose or fell. (Over time additional information is obtained to reduce the standard error and revise the final sales number.)

It can take up to five months for a trend in sales to emerge. New-home sales have averaged 806,000 per month over the past five months, compared with 833,000 in the five months ending in August.

Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and reduce inventories. Such incentives are not subtracted from the sales price reported to the government.

Sales are reported when a contract is signed, not at the closing of the sale. Home builders have reported a large increase in cancellations in recent months, with some builders reporting that 50% of orders are cancelled. Cancellations are not reflected in the government data, so the reported sales are likely overstated, and inventories are unstated
(should this be understated).

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