Existing home sales are up and new home sales are in a despair spiral. What’s up with that? Two days and two completely different reports on the US housing market. The National Association of Realtors reports existing home sales in the month of January jumped 3% and then the next day the US Commerce Department reports sales of new homes in January plummeted 16.6%. I repeat, what’s up with that? Are Americans suddenly averse to gleaming granite and oversized family rooms? I think not.
The answer, as usual, is in the numbers. Here are a couple of factoids to help clarify the reports:
- New homes account for 20% of the US housing market, existing homes the other 80%
- The National Association of Realtors data come from a sampling of 40% of the existing homes market. Margins of error are in the very low single digits.
- The Commerce Department has a far smaller sampling for its data, and margins of error for some of its housing numbers are as high as 40%(!)
- The existing home sales data are based on closings in a particular month.
- The new home sales data are based on contracts signed or deposits in a particular month and therefore do not take into account cancellations, which are far higher for new homes than for existing.
Ok, so a lot of the analysts are saying that the home sales data for January were skewed by weather, which actually makes a lot of sense. The weather in December, when existing home contracts would be signed for closings reported in January, was unseasonably warm, while the weather in January, when new home contracts would be signed, was just the opposite. Several bad winter storms likely kept hundreds of potential homebuyers sitting in their own homes in front of their not-so-new fireplaces.
But it’s more than that. New homes, which are on average slightly less expensive than existing homes, are still overpriced. While existing home prices have been on the slide for six months straight, new home prices actually bumped up in January, even as sales plunged. Not surprisingly, inventories of new homes surged as well. New home prices don’t figure in all the incentives, the giveaways, the help in financing that the big builders are offering, but bottom line, the big builders, who have to answer to their big public shareholders, aren’t quite willing to cut prices too much because that would hurt their big bottom lines.
And then there’s the overbuilding. There’s simply too much to choose from, and potential buyers, factoring in the glut of new homes out there, are factoring out value. This is especially the case in the west, where homebuilders during the boom really went to town in towns all over Arizona, Nevada and California. Big surprise new home sales in the west led the fall, crashing down a whopping 37.4% (+/-17.2%) from the previous month and 50.4% (+/-12/5%) from January of 2006.
So where’s the recovery everyone’s talking about? Well it’s not in new homes, at least not yet. Existing home sales are slowly crawling back, mostly because most older homes are clustered near cities, where land is limited, demand is higher, inventory is tighter, and sellers are more flexible. One thing’s for sure, given the latest numbers, if you’re in the market for a brand new home from a big public home builder, you’re in the minority, and therefore in the money.
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