Thursday, November 29, 2007

More on New Home Sales

by Bill McBride on 11/29/2007 11:45:00 AM

First, three key points to consider on housing.

Note: For more graphs, please see my earlier post: October New Home Sales

Let's start with revisions. In August, I wrote:

The new homes sales number today [August] will probably be revised down too. Applying the median cumulative revision (4.8%) during this downtrend suggests a final revised Seasonally Adjusted Annual Rate (SAAR) sales number of 757 thousand for August (was reported as 795 thousand SAAR by the Census Bureau). Just something to remember when looking at the data.
Sure enough, sales for August have been revised down to 717 thousand! The same is true for September (initially reported at 770 thousand, now revised down to 716 thousand).

The same will probably be true for the just reported October sales number of 728 thousand. It is likely the final number will be below 700K.

I believe the Census Bureau is doing a good job, but the users of the data need to understand what is happening (during down trends, the Census Bureau initially overestimates sales).

For an analysis on Census Bureau revisions, see the bottom of this post.

Next up, inventory. The Census Bureau reported that inventory was 516 thousand units. But this excludes the impact of cancellations. Currently the inventory of new homes is understated by about 100K (See this post for an analysis of the impact of cancellations on inventory).

This also means that the months of supply is understated. The Census Bureau reported the months of supply as 8.5 months. Assuming a typical downward revision, and adjusting for the impact of cancellations, the actual months of supply is probably closer to 10.5 months.

The impact of OFHEO reported falling prices on household assets. Also this morning, OFHEO reported that house prices fell in Q3. This will impact the Fed's calculation of household real estate assets. I expect household real estate assets to decline around $60 Billion in Q3. (0.3% price decline times $21 Trillion in assets).

Since Mortgage Equity Withdrawal appears to have still been strong in Q3, the percent equity will decline sharply! I believe this will start to impact the ability of homeowners to use the Home ATM in the near future.

New Home Sales and RecessionsClick on graph for larger image.

This graph shows New Home Sales vs. Recession for the last 35 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

This is what we call Cliff Diving!

And this shows why so many economists are concerned about a possible consumer led recession - possibly starting right now!

The second graph compares annual New Home Sales vs. Not Seasonally Adjusted (NSA) New Home Sales through October.

New Home Sales
Typically, for an average year, about 86% of all new home sales happen before the end of October. Therefore the scale on the right is set to 86% of the left scale.

It now looks like New Home sales will be around 800 thousand - the lowest level since 1996 (758K in '96). My forecast was for 830 to 850 thousand units in 2007 and that now appears a little too high.