New home sales are what I consider to be extremely soft data. They are based on the estimated number of signed contracts rather than actual closings. Some of these contracts have yet to even have had a building permit issued. And most important of all, let me re-emphasize the numbers are an estimate of newly signed contracts that can vary significantly from month-to-month. Some may never close, and others not for up to two years. And they face material revisions each month.
As an example of volatility, when the May 2014 new home sales data were released last month by the U.S. Census Bureau, they indicated that, as of that time, the seasonally-adjusted annualized rate (SAAR) of sales was 504,000. The May data have just been restated to a now 442,000. That is a 12.3 percent reduction. That’s like going sailing for a 1,000 mile journey only to find yourself 123 miles away from your destination at the estimated time of arrival. If the Apollo astronauts had the same level of error, they would have missed the moon by 2,939 miles. It’s akin to flying from Houston to Boston, but landing in New York City. Yep—not much precision here.
When they say close only counts in horse shoes and hand grenades, they are correct since new home sales are nowhere near as precise.
So now that you are aware of how soft, volatile and changing these data are, let’s talk about the June 2014 new home sales numbers. Treat with intrepidation and imprecision given the dynamic changes that future revisions can have on the data.
Year-over-year new home sales comparisons:
- June 2014 new home sales 406,000 SAAR vs. 459,000 SAAR in June 2013 – an 11.5 percent decline
- June 2014 median price was $273,500 vs. $259,800 in June 2013 – a gain of 5.3 percent
- June 2014 average price was $331,400 vs. $306,100 in June 2013 – a gain of 8.3 percent
- June 2014 months inventory was 5.8 months vs. 3.7 months in June 2013 – a gain of 56.8 percent
One of the tools I use to remove some of the randomness and monthly volatility is a 12-month average. The following two graphs show first the base or raw monthly data and then the 12-month moving average of the SAAR of new home sales. When looking at the 12-month moving average, you pretty quickly reach the conclusion that new home sales are relatively static.
The best takeaway from these data is in the median and average prices. No longer are homebuilders targeting first-time and entry-level homebuyers. In 2012, the median household income of those aged 25 to 34 was $51,381. Using a simple rule of thumb that a homebuyer can afford a home equal to three times their annual income, then entry level homebuyers would congregate around the $154,000 range (three times the median household income of those aged 25 to 35). Yet the latest median and average prices are at $273,500 and $331,400, respectively. That says to me that the new homes are not marketed to the 25 to 34 year old group. This would indicate that typical buyers today of new homes have median household incomes in the $91,200 to $110,500 range.
The second takeaway is that new home sales are remaining fairly constant – just look at the 12-month moving average of the SAAR of sales. Pretty flat.
To read the entire monthly press release on new home sales from the U.S. Bureau Census click http://www.census.gov/construction/nrs/
And if you do not like the current new home sale numbers, just wait a month. They will no doubt change. They always do.