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In the month of December, new home sales in the U.S. fell 14.7% to the lowest level on record, according to the Commerce Department. The decline in new-home sales to a seasonally adjusted annual rate of 331,000 was below the 390,000 consensus estimate. Year-over-year the pace of new homes sold in 2008 declined 37.9%; this is the lowest since 1982. The months' supply of homes on the market rose to 12.9 months in December from 12.5 months in November.

The Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction.

Existing home sales data are provided by the National Association of Realtors®. According to NAR, "the majority of transactions are reported when the sales contract is closed." Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.

Given the difference in definition, new home sales usually lead existing home sales regarding changes in the residential sales market by a month or two. For example, an existing home sale in January was probably signed 30 to 45 days earlier which would have been in November or December. This is based on the usual time it takes to obtain and close a mortgage.
Plus with the number of homes sitting in foreclosure, the banks are much more motivated to unload a home at a big discount than a builder is. Naturally, in this environment you would expect to see new home inventory increase, as there is better value in the foreclosed homes. Importantly, foreclosures aren’t in inventory of unsold homes and a growing portion of sales.

It appears that the homebuilders are competition with banks to unload inventory and the banks are winning!

Howard W. Penney
Managing Director