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Question Simplistic Interpretations of July New Home Sales
Jonathan Smoke / Hanley Wood / August 23, 2013
The Commerce Department reported the first read of July new home sales this morning with a headline of a month-over-month 13.4 percent decline. The July number came in at 394,000, compared to the revised June reading of 455,000. Economists had been expecting a reading of 487,000, which would have been a 2 percent decline from the original June number of 497,000. Despite the eye-popping decline, the month-to-month change was not statistically significant, meaning that we should generally view the monthly trend as unchanged.
What is going on with these numbers? The Commerce Department data are based on estimates from sample surveys, so they are subject to sampling issues and various statistical errors. Even so, June was initially reported 9 percent higher. We are seeing some very noisy data.
It is important to note that the new home sales numbers represent contracts signed for new homes, which often take 6 months or more to turn into closings. The summer is typically the time of the year when new contracts begin to slow, especially when finished inventories are as low as they are now. This preliminary reading for July would indicate a much more significant decline than normal seasonality would cause. However, given the lack of statistical significance, we have to be very cautious about concluding this represents any form of a clear trend.
I fear this isn’t going to stop the talking heads from drawing a conclusion from this iffy data point that rising interest rates have caused the housing recovery to stall. Already NAHB has issued a press release to that effect.
Let’s look at some other data points for insight.
Metrostudy collects data on new home contracts as reported directly by production home builders across major markets in the country. Because of variation in communities reporting over time, we focus on traffic and sales per community. From that data we see no clear signs of decline beyond normal seasonality. July traffic increased per community over June by 2 percent, while contracts per community declined 9 percent over June. Both stats were higher than a year ago. Interestingly, using the Metrostudy data the July decline this year was almost exactly the same decline as last year, further indicating that all we are seeing is the simple reflection of the seasonality that normally happens in July.
Yet this year we know that builders have raised prices and slowed the pace of sales in order to conserve diminishing quality lot positions while land development can catch up to future delivery needs. That wasn’t happening last year.
Diving further into the Metrostudy sales and traffic data we see some variability across markets but certainly no clear signs of alarming trends that support the notion that new home sales have “paused.”
In fact, some areas seem to be jumping in traffic and sales. For example in traffic, North East, NV leads with a 249 percent increase over the prior month average followed by Tooele County, UT at 163 percent. Areas across Virginia, California and Maryland complete the top five areas with big increases in traffic.
Moving to contract growth for specific market areas, Tooele County, Utah holds the top spot with a 350 percent increase in average contracts over June. North East, NV appears second with a 286 percent increase while areas in Virginia and Maryland take the remaining positions in the top five.
Therefore, at a granular market area we are seeing some markets clearly up, some markets down as we would expect, and no consistent trend overall that looks anything more than seasonal.
Since the web has become a key part of the home search process, search trend data should be a leading indicator of traffic and sales. Google reports that searches (through Google) on real estate were up 14 percent in July over June and were up 34 percent over 2012. Likewise, searches on builders were up 11 percent in July over June and were up 4 percent over last year.
Recall that Wednesday’s existing home sales data from the National Association of Realtors pointed to increasing strength in sales, although those numbers represent closings, not new contracts. Also, remember that last week NAHB reported builder confidence up in August at the highest level in almost 8 years. A big drop off in new sales just doesn’t correlate nicely with these other statistics.
So we’ve got a confusing soup of data on home sales. It is too early from one questionable data point to conclude that interest rates, or anything else for that matter, are throwing off the recovery. We’re in the second half of 2013 and due to limited inventories and lot supplies we are not likely to see rates of new home sales jump from here, but I wouldn’t bet on them declining either.