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Thursday, March 27, 2008

New Home Sales Revisions

by Calculated Risk on 3/27/2008 04:44:00 PM

After the Census Bureau releases the preliminary New Home sales estimate, they revise the estimate three times (over the next three months) as more data becomes available.

Historically the revisions can be in either direction - higher or lower - but beginning in 2005 I noticed that most of the revisions were down. All of the revisions (between preliminary and final) were down in 2006 and for most of 2007. It appeared that the Census Bureau had a systemic error in estimating preliminary sales during periods of rapidly declining sales.

New Home Sales Revisions Click on graph for larger image.

This graph shows the percent difference between the final revision and the preliminary release since the beginning of 2003.

Although we don't have the final revisions for December '07 and January '08, I've plotted the intermediate revisions - and the revisions are up slightly.

This suggests - tentatively - that the period of rapid declines in New Home sales may be over. This doesn't mean sales can't fall further - they might, or that sales will recover to 2005 levels any time soon - they won't. This is just a hint of a change in trend (I was using the same hint in '05 arguing the sales bubble might be over).

Another indication that we might be nearing a bottom in sales is that builder cancellation rates appear to be falling. As an example, Lennar reported today that their cancellation rate had declined to 26% in fiscal Q1 2008, from 33% in fiscal Q4 2007.

Earlier today, Stuart Miller, President and Chief Executive Officer of Lennar Corporation, said,

"Market conditions have remained challenged and continued to deteriorate throughout our first quarter of 2008. The housing industry continues to be impacted by an unfavorable supply and demand relationship, which restricts the volume of new home sales and, concurrently, depresses home prices in most markets across the country."
This "unfavorable supply and demand relationship" will probably continue for some time, but this may mean sales stay near this level rather than fall further. Also note, a spike down due to the recession is possible, but then I'd expect a fairly quick recovery back to the 600K level.