Weak Home Sales Suggest a Slog of a Recovery

The Commerce Department reports that September new-home sales fell 4 percent from August.

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Even before housing market bulls had finished celebrating their strong September existing-home sales report and the encouraging drop in the rate of price declines, a fresh set of figures on the residential real estate market has—once again—hosed down the outlook for a quick recovery. The Commerce Department today reported that new-home sales fell 4 percent from August and 8 percent from a year earlier. The decline puzzled housing market experts, who had projected sales to increase by nearly 3 percent, and suggests that the recovery will be a lengthy, fitful slog. "Even in the strongest recoveries, [data don't] march higher month after month after month," says Zach Pandl, an economist at Nomura Global Economics. The September new-home sales report "suggests that the recovery is going to proceed somewhat slowly and that we are not definitely out of the woods yet." Here are six things you need to know about the development.

[See Home Price Declines Becoming Less Jarring.]

1. Data distinction: The disappointing data on the market for new homes come just days after the September existing-home sales report showed a surprising 9 percent surge. One factor behind this discrepancy is that the two reports apply the term "sale" differently. Existing-home sales are counted when the transactions close, while new-home sales are tallied when the sales contracts are signed. "New-home sales were reasonably strong [around] midsummer . . . and existing-home sales [were] strong in September," Pandl says. "So you could argue that the disconnect [occurs] because [the two reports] are kind of taking a snapshot of home sales conditions at different times in the process."

2. Longer closing periods: This distinction is also important to keep in mind when considering the impact of the first-time home buyer tax credit on new-home sales in September. Currently, it can take as long as 90 days to close a home sale, although 30 to 60 days is more common. That means anyone signing a contract in September—particularly late September—may have a tough time getting the transaction done before the November 30 deadline for claiming the credit. "This dip in sales almost certainly reflects the impending expiration of the first-time buyer tax credit," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report. "Sales are trailing off now as people start to run out of time to close sales before the deadline. We had hoped the [September] numbers would hold up before an [October] drop, but the hit has come a bit sooner."

3. Never more difficult to sell: It's important to remember that new homes make up only a tiny portion of the home sales market today. New-home sales represented just 6 percent of total sales in September, down from more than 20 percent in early 2005, according to the Field Check Group, an independent real estate research company. Nevertheless, "selling a new home has never been harder," Patrick Newport, an economist with IHS Global Insight, said in a report. "The median time for sale was unchanged at 13 months—its highest reading ever (data start in 1963)."

4. Inventory dwindling: But the report was not without encouragement. For one, the supply of unsold homes has fallen dramatically. The raw number of unsold new homes posted its 29th consecutive monthly drop and now stands at its lowest level since 1982. While inventory remains at an elevated 7.5 months of supply, it, too, has fallen sharply from its recent peak of 12.4 months. "Single-family housing starts . . . will probably continue to grow because builders, at some point, will need to ramp up production, or they will lose sales," Newport said. "Rising housing starts imply that the job losses in the residential construction sector will soon come to an end."

5. Foreclosure headaches: Mark Hanson of the Field Check Group warns that foreclosure starts are outpacing new-home sales. For example, in September there were 31,000 new-home sales but more than 120,000 foreclosure starts, Hanson says. "Monthly foreclosure starts dwarf new-home sales. This is builders' greatest threat. The supply of foreclosures in the pipeline has never been greater," Hanson said in a report. "At some point when it rains foreclosures again, builders better not have a ton of competing inventory on hand."

[See Why Obama's Housing Rescue Hasn't Prevented Record Foreclosures.]

6. Pressing Washington for action: Once again, the National Association of Home Builders is using the disappointing data to pressure lawmakers to extend the first-time home buyer tax credit. "The fact that sales are now heading downward just shows how important the tax credit has been for stimulating buyer demand up to this point and how essential it is for Congress to move quickly on legislation that would extend the credit's expiration date and expand its eligibility to more buyers," NAHB chairman Joe Robson said today.

For his part, Hanson says the September new-home sales report makes some form of congressional action inevitable. "Today's results should guarantee extended stimulus out of Washington," he said.

[See Will the $8,000 First-Time Home Buyer Tax Credit Be Extended?]