Realty Check

New US Home Sales Improve, Prices Tank

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Sales of newly built homes in September came in well over expectations, and stocks of the big builders took a little tick up on the news.

They then dropped off pretty precipitously, as analysts weighed in on what is behind that nice headline number.

First of all, these particular monthly numbers are based on signed contracts to buy a home, not closings, which provide the numbers for existing home sales.

This data set is extremely volatile due to how small the survey pool is. And then of course you have these huge seasonal adjustments, which are important given housing's distinct seasonality, but they can really skew the reality.

So, the headline number is that sales (signed contracts) rose 5.7% from a seasonally adjusted annualized rate of 296,000 in August to 313,000 in September. Take out the seasonal adjustment, and don't annualize (the expectation of how many homes will sell this year based on the monthly rate) and according to the report, builders sold 25,000 homes in August and 25,000 homes in September. No change. The good news is that builders usually sell fewer homes in September than August, and they sold the same, hence the seasonal bump up, the bad news is that 25,000 is a pitifully low number of sales, actually tying a record low.

We can haggle over sales numbers 'til the cows come home (if their home isn't in foreclosure), but we really need to focus on the pricing numbers. The price of a newly built home fell 10.4 percent in September year over year to $204,400.00, which is about $200 higher than the low of 2003. Builders are being forced to compete with existing home sale prices, one third of which are distressed properties (foreclosures and short sales). The median existing home sale price in September was $165,400, so that's still a pretty big premium. Unfortunately, given the high cost of materials these days and difficulty in obtaining construction loans, builders take every dollar drop pretty hard.

"The pricing issue would generally hit everyone and would result in lower margins (and some additional impairments)," notes Dan Oppenheim at Credit Suisse.

Of course the pricing numbers also have noise in them.

"Those particular price figures are not adjusted for the mix of new homes being built, so the rate of decline probably also reflects the switch to building smaller homes rather than the so-called "McMansions" that were popular during the boom years," writes Paul Ashworth at Capital Economics, who says a turnaround in the new home market may still be a couple of years away.

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