Bittersweet Housing News?

Posted by: Maya Roney on May 24, 2007

Yes, new-home sales rose (or surged, or skyrocketed, or whatever) 16.2% (+/- 13%) in April to a pace of 981,000 from 844,000 in March, the U.S. Census Bureau reported this morning.

No, I didn’t expect it! But I don’t imagine I’m the only one who’s surprised considering the recent flurry of bad news from builders and realtors. Analysts expected sales at an 860,000 annual pace, with forecasts ranging from 800,000 to 940,000.

But it was the biggest increase in 14 years (yes, 14 years!) Maybe that’s not much of an accomplishment considering that new-home sales rose just 2.6% in March after plunging (yes, that’s the word) to the lowest level in nearly 7 years in February. New home sales were also still 11% lower than they were in April 2006 (but we’re just sick to death of all those negative headlines, aren’t we?)

Ironically, shares of Toll Brothers were trading up today after the luxury-home builder’s poor earnings announcement, because of the positive home sales report. In fact, all three major stock indexes rallied on the news.

“This suggests that the worst case scenarios for the housing correction will never materialize, and the housing market may in fact rebound faster than the consensus expects,” said Wells Fargo senior economist Scott Anderson.

But stock market gains evaporated after investors read a little deeper into today’s report. Builders are struggling, lending standards are stricter, so why then, did sales of new single-family houses, which account for about 15% of total home sales, increase?

Here’s the reason: The median price of a new home fell 11% last month to $229,100 from $257,000 a year earlier, the biggest decline since 1970.

“The big price decline implies that builders are slashing prices to move the huge overhang of unsold inventory,” said Barry Ritholtz of Ritholtz Research and Analytics.

Indeed, the inventory of unsold new homes fell to 6.5 months (seasonally adjusted) in April from 8.1 in March. Ritholtz has uncovered another interesting trend: whenever new-home sales have had a double-digit gain in the past 15 years, they nearly always decreased in the following month.

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

Tomorrow, keep your eyes peeled for the National Association of Realtors’ April existing-home sales data.

Reader Comments

Rich

May 24, 2007 12:51 PM

There's a difference between a writer who writes about housing and somebody who actually goes out and tries to buy a new home today. If you actually went out and tried to buy a house, you would know what you are writing about.

The reported new home "sales" aren't really completed sales. They are deals. A third or more of them will fall through before closing. There is enormous sales pressure coming from homebuilders to unload merchandise. On top of the 10% price decline reported, there is another 20-30% of unpublished incentives. Some homebuilders will buy your existing home to sell you a new one. Is this a real "sale?"

Why can't any mainstream press writer who writes about housing get it straight? The housing market is a slow-ticking time bomb. At higher interest rates and lower home prices, the desperation sales and foreclosures will heat up in the months ahead. Pumping new construction into this market is a death wish. The smartest homebuilders will put the brakes on. This is going to unwind over 3-4 years minimum. For homebuilders, it isn't about profits. It's about survival.

Alec

May 24, 2007 1:01 PM

Also, unless I'm mistaken, the median prices these homes sold for dropped dramatically. In essence, alot of home builders slashed prices to unload excess inventory. So the news may be even less rosy than you thought.

lizziebeth

May 24, 2007 3:04 PM

Here in Lakewood Ranch(Bradenton/Sarasota)homes have started to sell. They are short sales, builders slashing almost 45% and desperate homeowners that are holding more than one home slashing prices to reasonable price(2003 prices). Auctions are helping as well. Auctions are proving that this area has lost the gains of the last two years!

I think we are seeing people who were on the sidelines waiting for prices to drop and those die hard investors who truly believe the prices will go up! This is just the first wave of "wow, what a great price..better buy now before it goes back up.....". The worst isn't over. If you look at the number of contract pending vs. for sale signs you will notice only about 5% of listed homes are contract pending!

Brandon W

May 24, 2007 6:44 PM

The NAR report always makes for good comedy. Put on your waders; it's going to get deep.

Even if existing home sales don't drop as much, the availability of new homes at rapidly dropping prices will drag existing-home prices down in the next 3 months or so. This could quickly turn into a feedback loop... a downward spiral.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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