Wheeee! New Homes Sales, Prices in Freefall

Get ready for a new round of serial bottom callers!

New Home Sales data was released this morning, and it stunk up the joint. (Why are people still so surprised by this?).

Here’s the SALES and SUPPLY details:

Sales are down 21.2% in the past year;

August’s sales pace was weaker than expected;

•  The sales figures do not account for canceled sales contracts (presently running above 30%);

The inventory of unsold
homes fell by 1.5% to 529,000 — an 8.2 month supply;

Completed homes not yet sold rose 1.1% to 180,000 — the first increase since May. 

Here are the PRICING details:
The median sales price of new houses sold in August 2007 was $225,700; the average sales price was $292,000. This is a drop of 7.5%;

This is the largest year-over-year price decline in 37 years.

Reported sales prices do not include non-monetary incentives,
such as paid real estate taxes, kitchen upgrades, installed pools, free vacations or new cars.

As we have noted many times in the past, the 8.3% drop from July to August is less than the 12.4% margin of error — and is therefore statistically worthless. (Special kudos to Marketwatch’s Rex Nutting for pointing this out). 

On the year over year data, the drop of 21.2% was in fact greater than the ±9.0%, margin of error (thats what  I call it; Commerce calls it the "estimated average relative standard errors of the preliminary data.")

>

Sources:
NEW RESIDENTIAL SALES IN AUGUST 2007
Residential Construction Branch
http://www.census.gov/const/www/newressalesindex.html
http://www.census.gov/const/newressales.pdf

New-home sales plunge 8.3% to seven-year low
Median sales price down 7.5% in past year, biggest drop in 37 years
Rex Nutting
MarketWatch, 10:01 AM ET Sep 27, 2007
http://tinyurl.com/2n3ddb

New-Home Sales Tumble 8.3% As Prices Decline More Than 7%
JEFF BATER
WSJ, September 27, 2007 10:03 a.m.
http://online.wsj.com/article/SB119089524605541278.html

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What's been said:

Discussions found on the web:
  1. jake commented on Sep 27

    Real estate will not bottom until their is blood in the streets; we’ve seen it in the mortgage originators but not in new home construction. Watch for at least one of the larger public home builders to go under before even considering investment in this group.

  2. W.Edwards commented on Sep 27

    Hey, as prices continue to fall, more homes will be valued at below the $417K GSE take-up level meaning lower interest rates for renters looking to buy a home! :)

    The flip side of course is if you’re a current homeowner with an ever increasing negative equity and a huge ARM reset coming up! It’s not so bad that people will lose their homes but I can’t see how a spike in bankruptcy claims won’t occur even under the tightened rules!!

  3. Stuart commented on Sep 27

    AND the dollar rallies up off its low when this report was released. Go figure.

  4. jswede commented on Sep 27

    “Reported sales prices do not include non-monetary incentives, such as paid real estate taxes, kitchen upgrades, installed pools, free vacations or new cars.”

    ding ding ding!!!

  5. Bob A commented on Sep 27

    They keep talking about ‘recovery’ as if this whole housing boom is going to be repeated anytime soon. Not.

  6. Mr. Beach commented on Sep 27

    I’ve been wondering why the market continues to go steady and go up in the face up at least another 12 to 18 months of bad news from the housing market.

    My theory: Money managers in BRIC, the Middle East and Europe may consider the US Stock Markets their “Safe haven equity investments.” And will continue to buy the dips in the US markets.

    With the rise of larger sovereign wealth equity funds, this foreign bid will only get stronger.

    Under this scenario, markets in the US can only correct when foreign buyers are disabused of their notion of safety in American markets.

  7. KP commented on Sep 27

    These foreign entity’s economies still depend in large part on the US consumer. When the consumer finally falls, so shall they and their bids.

  8. wunsacon commented on Sep 27

    Barry,

    >> As we have noted many times in the past, the 8.3% drop from July to August is less than the 12.4% margin of error — and is therefore statistically worthless.

    Do you mean that literally? True, given the margin of error, we don’t actually know for sure whether the underlying reading rose or fell. But, the data still tells us *something*, right?

    For instance, the number:
    – 8.3% +/- 12.4%
    is not the same number as:
    -18.3% +/- 12.4%
    or
    -38.3% +/- 12.4%
    If the government announced either of these latter numbers, wouldn’t you view the housing market as even *more* “in the toilet”?

    Sure, it’s not very helpful to get a reading with so large a margin of error. But, it’s not *literally* worthless, right?

  9. Pool Shark commented on Sep 27

    Does this mean now is a good time to buy or sell a home?

    Bob A,

    “They keep talking about ‘recovery’ as if this whole housing boom is going to be repeated anytime soon.”

    It will be repeated…

    In the long run…

    Problem is; in the long run we’ll all be dead.

  10. Rob Dawg commented on Sep 27

    • The sales figures do not account for canceled sales contracts (presently running above 30%);

    The 30% figure was pre-Turmoil reflecting merely this spring’s buyer reluctance to close on a declining asset. Sallie Mae anyone? I would be shocked if pending closing times weren’t stretched 50% longer and cancellations ultimately well over 50%. And those extended periods between contract and closing are going to distort several important metrics until people catch on. The same credit Turmoil is also distorting the mortgage applications data.

  11. karl smith commented on Sep 27

    As we have noted many times in the past, the 8.3% drop from July to August is less than the 12.4% margin of error — and is therefore statistically worthless.

    Barry just means that if zero is anywhere in your confidence interval then you can’t even be sure there is an effect.

    Put in less nerdy terms. We don’t know for sure that housing even declined in August.

    Do we know anything? Yes, there it is a pretty good bet that housing didn’t do +15%. In fact, it is unlikely that housing did better than +4%.

    However, since we housing could have done positive we can’t say there was a statistically significant decline.

  12. CT commented on Sep 27

    I was also wondering about that 30% cancellation number and what it meant. Here is the info from the Census Bureau website. I love the last sentence.

    ——————–
    The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the “for sale” inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice. As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.

  13. Brian B. commented on Sep 27

    I was a loan officer in California 2 years ago and saw first hand the craziness of those loans. Just look at that home appreciation chart. Anyone here want to go long? Actually saw a chart similiar to that in 2005, that was the final straw that led me to sell my home and move to Colorado. A 10-15% decline here on a cheaper house is better than a 30-40% in Cali. I had one home in Cali that tripled in value, you have to think that a 30% reduction is not implossible, and I agree, like the tech bubble, maybe once in a lifetime exerperience.

  14. karl smith commented on Sep 27

    in the long run we’ll all be dead.

    In the long run we are all dead

    The difference is subtle but philosophically important

  15. anon commented on Sep 27

    In the context of all the negative housing news, Lennar’s announcing job cuts yesterday plus all the financial services lay-offs resulting from the credit market “dislocations”, anyone like to comment on the reliability of the jobless claim data out today and the under/over for next week’s NFP data? When will the “birth/death” data wake up to reality?

  16. Das Gherkin commented on Sep 27

    What does Conrad DeQuadros think? He was pretty sure the weather had something to do with the bad sales figures back in March.

  17. VJ commented on Sep 27

    Get ready for a new round of serial bottom callers!

    First up, Jim Gillespie, CEO of Coldwell Banker:

    “But my take on this is that the bull run that we enjoyed was 10 years. Typically in real estate, a good run will last four, five, sometimes six years. The correction is 12 to 18 months. Since this bull run was twice as long for 10 years, I would think that maybe 30 or 36 months it would be over which would put it sometime in early 2008 or mid-2008 which is what most of the experts are saying.”

    Oh, and according to a survey by Coldwell Banker titled the ‘annual home price comparison index‘:

    “which showed a less than 1 percent drop from last year in the average sales price of a four-bedroom, two-and-a-half bath home in the more than 300 markets it surveyed”

    (Enough qualifiers in there for everyone ?)

    Mr. Gillespie adds:

    “For prices to only drop 2 percent after a 10-year bull run is actually absolutely amazing.”

    That’s not what’s amazing.

    NBR TRANSCRIPT
    .

  18. Ralph commented on Sep 27

    Don’t mean to harp but I have said this here before. One should always look for 3rd party validation for data like this, especially if the source is our government.

    One has to look for something that one can truly trust. For new home sales, the best source is the 20 or so publicly traded home builders. These folks have Sarbanes Oxley keeping them honest. I can not emphasize how important that is. These are folks who would give anything to be able to say that things are turning around and yet what they are saying is exactly the opposite.

    On another note I trade mostly options. I have several Oct Puts on the home builders that I want to roll over into future contracts. It is usually quite difficult to know when to trade out of the existing and buy into the new contracts in a profitable way. Fortunately with the home builders, it is big data days like the home sales data make this very easy. I closed most of of my puts just before the data. Now comes 2 to 3 days of upticks via the bottom fishers and then I will have some great entry points for the new trades.

    My deepest thanks to all the bottom fishers.

  19. seamus commented on Sep 27

    Love the Jim Gillespie quote — the boom was twice as long as usual, so the bust will be, too.

    EXCEPT that real estate doesn’t work on those types of cycles. Fundamental demand is driven by people who want to move from renting to buying. In the past boom, the demand was artificially stimulated by forces that no longer exist, leaving only the fundamental demand from earlier. And supply is still in the pipeline. So what you’re left with is much, much lower demand, and greater supply. Home price appreciation can’t possibly exceed inflation for a long, long time.

  20. VJ commented on Sep 27

    seamus,

    So what you’re left with is much, much lower demand, and greater supply. Home price appreciation can’t possibly exceed inflation for a long, long time.

    Oh, but not according to David Lereah (He’s BAAAAAAACK !):

    “The demand is there. Consumers are ready. They need the mortgage funding and they need prices to come down a little bit more.”

    [David Lereah, with the National Association of Realtors, speaking on this evening’s NBC Nightly News]

    :]

  21. touche commented on Sep 28

    “Real estate will not bottom until there is blood in the streets”

    More specially, real estate will not bottom until the bulk of foreclosures hit the market and are sold. This will take many years to complete. We have seen this cycle before, but there’s a difference. Consumers have never been as much in debt as they are today relative to their income, lending standards have tightened up tremendously and many former home owners will have tarnished credit records. There is no way to avoid the slaughter.

  22. Jayson Manship commented on Oct 23

    Homebuilders in the Midwest are definitely struggling. I worked for a homebuilder in Indianapolis and the market here is terrible. I have started a blog about growing a business in the housing market: http://www.urbacs.com/blog

Read this next.

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