Reclaiming Common Sense

The New Home Paradox - Which Comes first the Starts or the Sales?


There are a number of "key economic indicators." The "Jobs Report" is released normally on the first Friday of the month. Two weeks later we receive the data on the consumer price index (CPI) and retail spending as well as the new home construction data. The next key indicators are new home sales and existing home sales. This month we saw  "weak new home construction data." The starts were only slightly better than January 2016and well below the pace set during 1983 and 1992, not to mention the heyday period of 2005-2007. Completions were off slightly from January 2016. We need starts to generate home under construction and homes under construction to generate completions. If we don't have completions then we cannot have sales. The December Construction data was lackluster with slight improvement on starts compared to December 2015 and a slight worsening of completions compared to December 2016.We saw a spike in new home completions  and a slight uptick in starts during November. The same could be said regarding the October starts and completions data. We have seen a constant rise in units under construction for the past year or so.  A growing number of homes under construction could be an indicator of a slowing sales market.


So what was reported and what was recorded with regard to new home sales? It was underwhelming.


January New Home Sales were Better than 2016, Worse than 1992-2008.The problem is that the rest of the media is discussing how this is the best January sales number since 2009. They forget to mention that this volume is half the volume we saw during 2004, 2005, and 2006.


The Average Sales price was strong - Still weaker than January 2016. The rest of the media will probably talk about how the average sales price is down from last January, forgetting that last January was a record.


The Annualized rate of sales was quoted at 555,000 Units - after the December value was revised down to 535,000. The problem is that the number of units sold during January this year was only 2,000 more than what were sold during January 2016. We are starting the year at a slower pace than we saw during 1993 when we started with 604,000 units. It was even slower than 1984 when we started with a pace of 630,000 units. We ended those years at 622,000 and 666,000 units told. If we improve by 18,000 to 36,000 units from where we start then the final number for this year, eleven months from now, should fall between 580,000 and 595,000 units. Net-Net 600,000 is optimistic for this year


There were wholesale revisions to the prior months' data. The annualized data for units sold were revised down. The median sales prices for October, November, and December were revised downward. The average sales price was revised up for September, October, and November. The Amount of units on the market was revised down for November and December. Inventory rose faster than sales - we may have an oversupply of new homes. This may be good to relieve pressure on a low inventory of existing homes. Starts were slower than 1993-2005. Completions were slower than 1992-2008. Sales will remain slower than these levels until the starts and completions improve. Starts and completions will improve when sales improve. Who is going to mover first?


It's the economy.