The Mortgage Reports Blog

The Graph That Shows Why New Home Sales Are At 17-Year Lows

In the last 24 hours, every business television program and newspaper has carried some variation of the "Home sales sink to 17-year low" headline. 

It's a negative-sounding headline and it ignores basic math and statistical analysis.

First, the New Home Sales report included a margin of error that was so large the Census Bureau had to add verbiage to its footnotes that read, paraphrased: "We don't know if New Home Sales increased or decreased last month.  This is our best guess."

Second, look at the graph above.  Of course New Home Sales fell last month -- just look at how sharply Housing Starts have fallen, too.  If fewer homes are being built, it makes sense that fewer homes are being sold. 

So, instead of citing 17-year lows, the better statistic for the press to report would have been the 11.0 month supply of new homes on the market.  Because it's up from 9.8 in February, buyers may now have additional negotiating leverage with developers that want (or need) to get their unsold, newly-built homes off the books pronto.

Just because the headlines read like bad news doesn't mean that the story is bad news, too.  Dig a little deeper for the real story, or if you don't feel like doing your own analysis, let me do it for you every business day and deliver it to you by email.

How New Home Sales Data May Be Misleading

According to the headlines, the national housing market is still going strong.  Last month's New Home Sales report bested consensus estimates which shows that developers are still building new homes, and that homebuyers are still buying them. 

But, what's left out of the report can be as important as what's included in it. 

Because the New Home Sales data does not separate by occupancy type, we can't know if the report is as strong as it appears.

The important question left unanswered:

How many sales in the report are second homes or investment properties? 

That key question (and its underlying answer) could change the entire dynamic of the report.

Knowing how many new home sales can be classified as second homes and investment properties would reveal how homebuyers perceive real estate investment risk.  The lower the perceived risk, the lower the likelihood that the country is experiencing a Housing Bubble. 

We know this because housing bubbles are self-fulfilling prophecies.

A deeper look into the New Home Sales report reveals that the South and West regions represented 80 percent of the new homes counted in the report. 

These two regions play host to plenty of retirees, snowbirds, and vacationers.  If the New Home Sales data is reflecting second homes and investments in those regions, we can infer that a host of speculators are still in the market.

If the new homes are classified as primary residences, though, it may be time to declare the Housing Bubble a dead horse, and declare that there shall be no more beating of it.  Strength in preimary residences would demonstrate that people are buying, and that demand is steady.

As always, there is more to the news than the headline reveals.

Source
U.S. Economy: New Home Sales Unexpectedly Increase in April
Bob Willis
bloomberg.com, May 24, 2006.  10:57 EDT
http://quote.bloomberg.com/apps/news?pid=10000006&sid=a8mBDqr0MV9Q&refer=home