New Home Sales Up (but beware double digit monthly gains)

Commerce Department reported that April new-home sales jumped an unexpected 16.2% — the biggest monthly gain in 14 years. The year over year drop in sales change was a drop of 10.6%.

By no coincidence, the median home price dropped a 11.1% from the prior month — the largest amount on record. The big price decline implies that builders are slashing prices to move the huge overhang of unsold inventory. Inventory of unsold new homes fell to 6.5 months (seasonally adjusted) from 8.1.

Regional sales were even more telling. As we noted earlier in the week, the greater NY region (and NYC Condo/Coop sales) are skewing the national data. Year-over-year sales in the Northeast surged 43.1%; sales were down 28.1% in the Midwest, and 25.4% in the West. Sales fell marginally (3.4%) in the South.


In the past, we have cautioned that double digit gains of new home sales are VERY unreliable monthly data points. (It is mostly due to the way the Builders self report their sales to Commerce).

Have a look at this analysis we did a few years ago:  It turns out that whenever New Home
Sales jump double digits, it usually reflects a mean reversion from the prior (or subsequent) month’s reportage. Indeed, over the past 15 years of data, we found that a mean
regression followed nearly every double digit monthly gains. Typically, the
subsequent month’s data was significantly lowered — flat to negative
in nearly every case:

New Homes Sales

onth, Year Double Digit Gain Subsequent Month Increase / Decrease
June 2003 10.7% July 2003  (-2.1%)
December 2000  11.7% January 2001  (-4.8%)
July 2000 11.9% August 2000 (-4.4%)
November 1998 11.4% December 1998 (-4.6%)
January 1998 10% February 1998 (-0.7%)
March 1995 10.2% April 1995 0.8%.
*February 1994; 10.82% March 1994 8.89%
April 1993  16.45% May 1993 (-10.70%)
September 1993; 12.56% October 1993 (-3.03%)
January 1992 21.15% February 1992 (-5.47%)

*February 1994 was the one exception — it was followed by strong
March and April data — but came after January 1994, which has the
honor of being the very worst month ever in the history of the Census Construction data: Down -23.77%.

In other words, stick with the two or three month



New Residential Sales
Commerce Department Census Division

U.S. April new-home sales unexpectedly jump 16%
Rex Nutting
MarketWatch, 10:00 AM ET May 24, 2007

Home Sales Soar by Record Amount

Thursday May 24, 10:09 am ET

By Terence Hunt, AP White House Correspondent

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What's been said:

Discussions found on the web:
  1. KirkH commented on May 24

    “At a recent courthouse auction, a five-bedroom, four-bathroom 3,500 square foot house on Richfield Way that sold in July 2005 for $526,000 was offered by the bank for $295,000. There were no takers.”

    Apologies for posting that quote twice but yowza, Sacramento is in a full on meltdown. If sales weren’t up with 40+% price cuts I’d be worried about the apocalypse.

  2. kharris commented on May 24

    Note also that the biggest source of the national rise in new home sales was a 27.8% rise in the South. Sales elsewhere were unremarkable. With home prices in the South typically lower than elsewhere, a huge sales rise in the South would pull down the median sales price.

    Even if we accept the sales figure at face value (I am personally rather eager to see the revisions), sales in April were merely on a par with Q4. Back in Q4, we thought we were having the weakest quarter in a long time. Wires quote a number of bank economists and their cousins giving full credence to the April data and talking about the worst being over. Worst being over is what they were saying after the Q1 GDP data too, so they are clearly sticking to the story.

  3. gmak commented on May 24

    My understanding is that the NON seasonally-adjusted number is 92,000, which is the lowest since April 2003 (91,000). April 2006 sales were 100,000.

    But the reaction to data is more important that the data itself. Speculators (equity) want to believe that the economy is getting better. So they will speculate accordingly.

  4. Fred commented on May 24

    “In other words, stick with the two or three month average.”

    I agree. Yet you can’t ignore that prices coming down an average of 11.1% is starting the process of flushing out the inventory (~20% of the inventory – in one month). Price correcting is the natural trigger. The “drive by MSM” loves rubber necking at the latest accident or problem here.

    Does anyone have a 3 month average chart going out there?

    Where’s Roubini’s deep dark recession, eh?

  5. ross commented on May 24

    These price drops no doubt exclude builder extras. How much is the real price drop including what builders are giving away with the new home contracts?

  6. Estragon commented on May 24

    BR said “The big price decline implies that builders are slashing prices to move the huge overhang of unsold inventory”

    Is it not also possible that the decline in median sale price reflects a pick-up in contract signings in lower priced homes? Also, if I’m reading the report correctly, contract signings appear to have grown most in the early construction stages.

    Put this together with a recent uptick in mortgage apps and the reported tightening in lending standards, and the picture emerging may be one in which lower end consumers are signing contracts and applying for mortgages, but are getting turned down and cancelling.

    Just in case that isn’t depressing enough, let’s also keep in mind that bonds are looking like they want to challenge the rate highs of 2Q06.

  7. Michael C. commented on May 24

    Thank you, Barry, for parsing the data and giving the real story.

    Is this large variation in regional sales common? What’s the reason this time around?

  8. michael schumacher commented on May 24

    Stick to two or three month averages…

    Why do that when you can take the “manhattan guy” approach (which is not very different from the way it’s really released) and just cut and paste the supposed positives like the N.E. “growth” rates while completly ignoring the continuation of the down trend in all the other area’s of the country. Nevermind that the builders are moving these houses at fake prices that do not incorporate all the freebies they have to include to move them.

    Take a look at the memory market from the late 80’s and early 90’s for a great parable. You had massive amounts of dumping of product (memory) on the market so that the sales numbers looked great…too bad there was no money to be made from that practice. Looks the same to me for the housing market.

    Just keep reporting those positive excerpts though MG……


  9. Greg0658 commented on May 24

    Is a foreclosed home on the books of a troubled institution that is transfered to another institution called a sale?

  10. stevez commented on May 24

    I guess Wall Street has a hard time understanding the concept that you need LOWER prices to attract buyers.

    After all, it seems to work the opposite way with stocks.

  11. michael schumacher commented on May 24


    therein lies a big problem upon which these numbers are presented.

    >>applying for mortgages, but are getting turned down and cancelling.>>

    A cancellation is STILL counted as a new home sale-from the builder supplied numbers. Cancellations are not backed out of the numbers. There is another BR post somewhere in this site that discusses this.


  12. Jim commented on May 24

    Bond Market reversal today, seems like a little hesitation on the rosy outlook. Bonds will have a short term rally and equities will correct over the next few weeks.

  13. Christopher Laudani commented on May 24

    Hey Barry,

    If gov’t stats were reliable – you would be out of work! (Although they would probably count you as employed anyway!)

  14. Winston Munn commented on May 24

    Hank Paulsen said the housing bottom is in, while Ben Bernanke said the subprime collapse is contained. How come foreclosures are at record levels and where are all the derivative losses in the CDOs hiding?

  15. Fred commented on May 24

    A. A correction is healthy and needed

    B. The yield curve is now positively sloped — a positive for growth and equites.

    C. The put buyer might spoil the party (again) for the bears…it has been > 1 all day.

  16. Estragon commented on May 24

    MS – I know that cancellations aren’t backed out of sales figures. That’s a big part of what makes the numbers so potentially depressing. The builders don’t seem to be suggesting that cancellations are easing yet.

    I also agree that these figures need to be viewed over at least a 3 month period to draw any conclusions. Like the starts and permits numbers, the margin of error is too high to draw conclusions on a single monthly number.

  17. Barry Ritholtz commented on May 24

    Remember, we are discussing two different issues: Sales volume, and Prices.

    The total sales seem to be hastily assembled data, and self-reported by the builders. Aside from the cancellation issue, I get the sense that they “get around to doing the numbers when they have to. I’ve always wondered if we end up with 8 weeks reported in a 4 week period.

    As to pricing, that’s an entirely separate issue, impacted by what price range homes are selling.

    In the mid to late part of the housing cycle (7th and 8th innings?), we see lots of Condos sold – nationally, they tend towards cheaper housing. At that point, they are probably skewing the sales data downward. In the midst of a boom, no one really notices.

    Later on in the cycle (9th inning?), we see the entry level buyer priced out of the market.
    As the cycle heads down, prices appear better than they really are. With the least expensive homes removed the data, prices – which are in reality falling – are skewed much higher.

    That’s before we even get to the Price hiding business Builders engage in – attempting to maintain sales prices by throwing in new kitchen upgrades, pools, taxes paid for a year, even Mercedes car leases. They hate to have an existing owner feel like they overpaid . . .

    See this for more details:
    The Not-So-Hidden Truth About Home Prices

  18. RP commented on May 24

    Fred: 5.25% is still above the 2, 5, 10, and 30…so how did you get to conclusion B?

  19. Businomics Blog commented on May 24

    Homes Sales Headed Up on Lower Prices

    Home sales are way up, thanks to falling prices.: Looks like developers have finally decided to accept lower prices to get the houses moved: In addition to developers dumping inventory at fire-sale prices, this month’s pattern is partially explained by

  20. Fred commented on May 24


    Sure…the Fed controls the FFR…at 5.25.
    But the MARKET has gone from serious inversion (and claims of a 50% chance of recession here) to a moderatley positive slope 1 year out. Also see that the 3 month bill (even after these “strong” numbers is only 14 bps from trading 10% below the FFR. That (market made) level always has forced the Fed to CUT rates.

    AND BY THE WAY…no notice here of the breakdown in the gold ETF GLD??…I’m sure Bernanke is noticing!

  21. Irving commented on May 24

    The only way for sellers (including new home sellers) to compensate for the tightening up of lending standards, is to lower prices. People who can’t qualify for bigger mortgages may indeed still be able to qualify for smaller mortgages. Builders will now be looking for ways to cut costs, and ofering smaller homes and/or lots so they can lower prices and move product in this new lender tightening environment.

  22. Michael C. commented on May 24

    I put in an offer this weekend for a newly built home. A little too low for them. Among other things, they are concerned of cancellations should other buyers waiting for their homes to be completed see that they just sold a home for a lot less.

    So be it. Home inventory is like a buffet out there. They keep putting out more than people can eat, and this is after a multi-year eating marathon.

  23. Winston Munn commented on May 24

    Quote Fred:

    “Sure…the Fed controls the FFR…at 5.25.
    But the MARKET has gone from serious inversion (and claims of a 50% chance of recession here) to a moderatley positive slope 1 year out. Also see that the 3 month bill (even after these “strong” numbers is only 14 bps from trading 10% below the FFR. That (market made) level always has forced the Fed to CUT rates.

    AND BY THE WAY…no notice here of the breakdown in the gold ETF GLD??…I’m sure Bernanke is noticing!”


    1). The Federal Reserve does not control the Federal Funds Rate – the Federal Reserve announces a target rate but the markets set the actual rates. The only thing the Fed literally controls is the discount rate.

    2). The inverted yield curve has been a 100% indicator of a recession start within a year after it has inverted for 3 consecutive months – a recession could start anywhere from Q3 2007 to Q3 2008 and still be within these paramenters.

    3). Spain’s central bank dumped 80 tons of gold onto the markets in order to create liquidity and avoid a financial meltdown due to their housing bubble crisis and trade imbalances.

    4). There is no Easter Bunny and Goldilocks is really only a fairy tale.

  24. ZeroBeta commented on May 24

    Hey Barry,

    Great post. Today showed us the equivalent of a fire sale and shows a market with a ton of sellers and a lack of buyers – the sellers probably too much in debt.

    I posted a piece on the retail sales and weather and show how it ties in with the Northeast’s skew in these numbers.

  25. Greg0658 commented on May 25

    FYI World

    If anyone has seen my “Family of Man in the Garden of Eden” shot off my “Unity” photo essay …

    after 25 years off thinking about the burnt up dollar and sharing concept

    I still have no clue how to transform this Capitalist world.

    I also came to the conclusion if I dreamed it up alone, it wouldn’t work anyway.

    I’m actually coming around to … but I know its wrong … “That Capitalism is the Best Path to Prosperity” … if ya can’t beat em join em.

    I can’t figure out how to get lazy asses to work. How to get real down and dirty labor (rigorous schooling) to be paid fairly. And how excesses can be curbed. In this energy dependent/exhausting world – is 35,000 sq feet of house to one family prudent?

    Arts vs. Sports
    Artists vs. Jocks

    In Gene Roddenberrys Star Trek, was the USS Enterprise launched from this humanist system?

    ps – I Do Not want the job of President, I can’t be your puppet.

  26. Fred commented on May 25

    Winston….nice try, but no ciggy:

    Fed funds rate

    “The interest rate that banks charge each other for the use of Fed funds. It changes daily and is a sensitive indicator of general interest rate trends. The Fed funds rate is one of the two interest rates set by the Fed, the other being the discount rate. While the Fed can’t directly affect this rate, it effectively controls it in the way it buys and sells Treasuries to banks. This is the rate that reaches individual investors, though the changes usually aren’t felt for a period of time. also called Federal funds rate.”

    The FFR is NOT a market determined rate, and it is disingenuous to suggest otherwise.

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