New Home Supply May 2009 - May 2010

One month after the federal homebuyer tax credit’s official expiration, the New Home Sales report turned in its worst showing ever.

In May 2010, for the first time in 11 months, the inventory of unsold new homes crossed the 8-month marker, posting an 8.5 month supply overall.

Additionally, new homes sales volume fell to 300,000 units nationwide — a drop of 32% and its lowest level since the Commerce Department started tracking data in 1963.

Now, universally, the press is referring to the May New Home Sales report as “poor“.  A closer look, however, shows that may not be the case.

For one, we have to keep New Home Sales in perspective as a percentage of overall home sales. Yes, there were just 300,000 new homes sold in May, but there were also 5.66 million “existing” homes sold.

New Home Sales, therefore, accounted for just 5 percent of the total housing market — a very small percentage.

Another reason why the weak New Home Sales data isn’t so awful is that, when New Home Sales stall, it actually benefits home buyers.  Excess supply puts a strain on sellers which, in turn, gives buyers a tremendous amount of leverage in negotiation.

When home inventories are high, builders are more apt to appease their customers in hopes of making a sale.  For San Jose home buyers, this can result in buying a better product at a lower price.

Especially with builder confidence plummeting.

Since February 2009, housing has shown steady gains. There’s been both peaks and valleys across units, inventories, and prices, but overall, the market is improving.  May’s New Home Sales data shows how now may an opportune time to “buy new”.

New Home Supply April 2009 - April 2010The supply of newly-built homes for sales plummeted in April, a positive indicator for the San Jose housing market as we head into the summer months.

It’s no wonder that homebuilders are breaking new ground at the fastest clip in 2 years

At the current sales pace, the nation’s complete supply of new homes would be sold in just 5 month’s time.  That’s more than double the pace of a year ago.

Also, as more good news, in terms of total housing units, the government reports that New Home Sales topped one half-million homes sold for the first time since May 2008.

It’s a similar spike as within the Existing Home Sales data released earlier this week.

But before we declare the housing market “repaired in full”, we have to consider a few of the reasons why home sales are charting so strongly.

The first reason is the federal homebuyer tax credit’s April 30 expiration. In order to claim up to $8,000 in tax credits, home buyers must have been in mutual contract for a property before May 1. There is no doubt this contributed to a run-up in sales, especially among first-time home buyers.

The second reason is that mortgage rates have remained exceptionally low, defying expert predictions.  Low rates don’t sell homes, but they do make monthly payments easier to manage for households torn between renting or buying.

And, lastly, March and April’s new home sales may have been buoyed by aggressive discounting on behalf of homebuilders.  As compared to February 2010, April’s average new home sale price was lower by 13 percent.  That’s a sharp drop in a short period of time.

For now, though, homes are selling, supplies are dropping, and buyer interest is high. It’s no wonder builder confidence is soaring.

New Home Sales Mar 2009-Mar 2010The sales of newly-built homes soared in March. Even more than what was expected. But the news may not be as glowing as what the media is telling us.

Take a look at the headlines from last Friday:

  • Sales of new homes rocketed up 27 percent in March (WaPo)
  • New-home sales rise fastest in 47 years (CNNMoney)
  • Sales of New Homes Climb by Most Since 1963 (Business Week)

None of these statements is false, per se, but each is somewhat misleading.  The biggest reason why March’s New Home Sales was even able to rise 27 percent is because data from the month before it — February — was the worst in New Home Sales history.

In February, new homes sold posted its lowest level in recorded history. 

A better comparison would be against March a year earlier; or October 2009, the month before the home buyer tax credit’s initial expiration date. 

Against both of those time periods, March 2010 fared well.

Home buyers – first-timers and repeats alike — went under contract last month, taking advantage of the soon-to-expire federal home buyer tax credit program.  The credit gives up to $8,000 for first-time buyers and up to $6,500 for repeat ones.

Buyers must be in mutual contract on or before April 30, 2010 to be eligible for the credit, and must closed on or before June 30, 2010.

The New Home Sales data included other strong housing data, too. The current supply of new homes nationwide is at a multi-year low.  Along with stronger home demand, this should push San Jose home prices higher throughout the coming months.

It’s no wonder builders are bullish on the economy.

New Homes Supply Jan 2009-Jan 2010

The housing recovery showed particular weakness in the New Homes Sales category last month — good news for homebuyers in Willow Glen and around the country.

A “new home” is a home for which there’s no previous owner.

New Home Sales fell 11 percent from the month prior and posted the fewest units sold in a month since 1963 — the year the government first started tracking New Home Sales data.

Right now, there are roughly 234,000 new homes for sale nationwide and, at the current sales pace, it would take 9.1 months to sell them all. This is nearly 2 months longer than at October 2009’s pace.

The reasons for the spike in supply are varied:

  • The original home buyer tax credit expired in November
  • Weather conditions were awful in most of the country in January
  • Weak employment and consumer confidence continue to hinder big ticket sales

Now, these might be less-than-optimal developments for the economy as a whole, but for buyers of new homes, it’s a welcome turn of events. Home prices are based on supply and demand, after all.

As a result, this season’s home buyers may be treated to “free” upgrades from home builders, plus seller concessions and lower sales prices overall.

It’s all a matter of timing, of course.  New Home Sales reports on a 1-month lag so it’s not necessarily reflective of the current, post-Super Bowl home buying season.  And from market to market, sales activity varies.

That said, mortgage rates remain low, home prices are steady, and the federal tax credit gives two more months to go under contract. It’s a favorable time to buy a new home.

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New Home Sales Nov 2008-Nov 2009One day after November’s Existing Home Sales report blew away estimates, the Census Bureau’s related New Homes Sales report failed to impress.

A “new home” is a home that is newly-constructed; not bought as a resale.

In a lackluster showing, New Home Sales dropped 11 percent in November, falling to the lowest levels since April. Furthermore, the all-important “months of supply” climbed by a half-month to 7.9.

The press pounced on the figures and if you only read the headlines, you’d think that housing had cratered.  Some of the angles were quite bold, even:

  • Weak U.S. Home Sales Show Recovery’s Shakiness (Reuters)
  • New Home Sales Plunge In November (CNNMoney.com)
  • Housing Forecast : Off Life Support, Still In Critical Care (CBS News)

These headlines, although technically accurate, only tell half the story, however. The other half relates to November 30’s role as the original First-Time Home Buyer Tax Credit ending date.

See, different from home resales, when a contract is written on a newly-built home, the home is rarely finished.  This is the same in California as in any state.  According to the Census Bureau, just 1 in 4 new homes are sold “move-in ready”.  The other 3 of 4 are in various stages of construction when a buyer signs on the dotted line.

Some have yet to break ground, even.

Regardless, it’s at this date of signing that the Census Bureau counts the home as “sold” — not at the actual closing.  This is the main driver of the November New Home Sales data dip.

First-time home buyers in Los Gatos would have risked up to $8,000 in federal tax credits if they bought a newly-built home and it wasn’t ready for move-in by November 30, 2009.  And it wasn’t until November 5 that the credit was officially extended.

Suddenly, first-timers representing more than half of last month’s Existing Home Sales isn’t so shocking. Buying new carried a lot risk.

There’s always more to the story than the headline.  Sometimes, you have to dig deeper. Looking back over 10 months, the housing market is on a steady course of improvement. November’s New Home Sales data — although weak — is not terrible.

Despite what the papers might say.