August New Home Sales, More Bad News on Housing

Reports on August new home sales initially touted the unexpected uptick from a 1,009,000 annual rate in July to a 1,050,000 annual rate. Fortunately, some folks noticed that the July numbers had been revised down from a previously reported 1,070,000 annual rate. Still, some reports noted the goods news that inventories of unsold homes had declined modestly from a record 570,000 in July to 568,000 in August. Well, that one isn't exactly right either. The July inventory numbers had previously been reported at 568,000.

The August report also showed a modest 1.3 percent (nominal) decline in median prices. This nominal price drop, which is approximately a 5 percent real price decline, in fact hugely understates the true fall. Builders in many of the formerly hot markets are giving large concessions in the form of free add-ons, below market mortgages, subsidized closing costs, and buyer side realtor bonuses. An accurate accounting of these concessions would certainly push the true price down further.

The sales figures are also somewhat exaggerated, since there are many more cancellations now than in the past. (Cancellations are never subtracted from sales.)

This downtick is just the beginning. Houses are still being built much more rapidly than end users want to buy them. Building will not fall to a sustainable level until prices drop more. The trend level for house prices is about 30 percent lower than current levels. This is going to get really ugly.

-- Dean Baker

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