(January 31, 2007) – The December New Home Sales report, released by the U.S. Census Bureau earlier this week, was butt-ugly. Sales of new one-family houses in December 2007 were at a seasonally adjusted annual rate of 604,000. This is 4.7 percent (±12.1%) below the revised November rate of 634,000 and is 40.7 percent (±7.8%) below the December 2006 estimate of 1,019,000. The seasonally adjusted estimate of new houses for sale at the end of December was 495,000. This represents a supply of 9.6 months at the current sales rate. An estimated 774,000 new homes were sold in 2007. This is 26.4 percent (±2.5%) below the 2006 figure of 1,051,000.
The median sales price of new houses sold in December 2007 was $219,200; 10.4% lower than the December one year earlier figure of $244,700.
But we should be cautious when drawing conclusions from current production metrics. For one thing, the error bands around the estimates are extremely wide, especially for monthly numbers. For another, we should remember that annualized numbers, like the monthly sales figure of 604,000 units, are misleading. Annual rates tell us what the annual number of new home sales would be if the month of December were repeated 12 times in a row–this always exaggerates monthly variations. The true figure for December is that 53,000 new homes were sold, 1/12th of the 604,000 annual rate in the report.
Low monthly run-rates also make inventories–always quoted as the number of months’ sales–appear excessively bloated. For example, the current report states that inventories have increased from 7.6 months in December 2006 to 11.7 months last month. But the number of new homes for sale actually declined from 537,000 to 494,000 over the same period, which suggests the market may be less burdened with inventory, not more so.
But the most important reason for caution is that new home sales are inherently less interesting than existing home sales for the simple reason that there are so many existing homes. According to the Census Bureau report on residential vacancies and homeownership, there were 128.2 million existing housing units in the United States in the third quarter 2007. That’s 2,545 existing homes for every one of the 50,300 new homes sold in December, and 166 existing homes for every new home sold during all of 2007. In December 2007, 4.89 million existing homes sold, an annual rate of 5,652,000 units. The stock of existing homes is worth a cool $12.2 trillion.
This is what I meant a few days ago when I said nothing interesting ever starts in the production (GDP) economy. The big events always take place in the balance sheet when people change their mind about the desirability of owning the assets that already exist.