New Homes Sales, the Rest of the Story

The May data for new home sales came in somewhat higher than expected. It is important to keep in mind that the home sales data record contracts, not completed sales. In the boom period a year ago, broken contracts were rare. Now that prices are weakening in many of the formerly hot markets, broken contracts are becoming common.

To my knowledge, no one keeps data on the percentage of contracts that are broken, but there have been reports from some builders in California and Florida of cancellation rates in the range of 20-30 percent. If the nationwide rate of cancellation is even 5 percentage points higher than last year, it would conceal a sharp falloff in actual sales.

One key measure that gets around this issue is the number of unsold homes. This was 556,000 in May, essentially the same as April's record high of 560,000, and more than 100,000 higher than the inventory of 450,00 reported in May of 2005.

--Dean Baker

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