January 28, 2011

New Home Sales Are Currently a Meaningless Economic Indicator

I just saw a headline declaring that new home sales are the lowest they've been in 2000 years.  Or something like that, OK I'm exaggerating on the figure the actual article says New Home Sales in 2010 fall to Lowest in 47 years., but it may as well said 2000 years.      Then I turn around and I see an article saying that New Home sales hit eight-month high.

The first article "lowest in 47 years" gives us the "oh no!  the economy sucks" interpretation.

The second article "sales hit 8 month high" gives us the "yay! we're turning it around" interpretation.

We can see that the same set of data telling us completely contradictory things based on how its interpreted and presented.   Its the worst of times and the best of times?  

Generally I don't think the new home sales is really useful measure of the economy right now.   There are so many foreclosures out there nowadays and home prices are depressed to the point that new homes are not going to be a viable or good option for many people.    In many places you'd be crazy to buy a new home when you can buy a new home from just a few years ago for for 30-50% off.

My wife and I have been shopping around for homes a little bit.   We looked at some new homes.    They were over priced compared to the used homes on the market.    As an example one developer is selling a new house for $179 per sq ft.    In the same area theres a 10 year old foreclosure for  $118 per sq. foot or an 8 year old house for $138 per sq ft.  The new house in our area has a 30% price premium over the existing  house and 50% more than a foreclosure.   This is just our area and I'm sure that things differ quite widely in other cities and states.   But it serves as an example of how new homes aren't as compelling given the bargains out there.

I was actually surprised and doubted that the new home sales were at a 47 year low.  But Census data confirms it.   Dating back to 1963 the new home sales were never under 400k a year and in 2010 we dropped down to just 321k.   As recent as 2005 there were over 1.2 million new homes sold.

From the census site we can find that there are about 130 million housing units in the US and around 66% of us are homeowners.   That gives us approximately 85.8 million single family homes in the USA.    With a 1% growth rate in the population then we should have demand for approximately 850k more homes every year just due to population growth.  

Until the foreclosure rate drops and the housing market regains some of its former health I don't think new homes will really pick up in any meaningful way.    Watching the new homes sales rate is about as useful as watching the American auto manufacturer hiring rates.

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