New home sales (on a preliminary basis) dropped 7.8 percent in May 2019 Vs April and were down 3.7 percent compared to a year ago to 626,000 homes on a seasonally adjusted annualized rate (SAAR) according to the U.S. Census Bureau. New home prices were essentially unchanged from a year ago, with the median for May 2019 at $308,000 down 1.6 percent vs a year ago and the average at $377,200 up 2.4 percent.
Sales on a SAAR are shown in the graph below along with monthly median price commencing 2007.
The median price for both new and existing home sales monthly since 2001 are shown in the following graph. New home prices have exceeded those of existing homes every month, although the premium varies over time. Existing home sales show a highly defined seasonality, with June of almost every year the peak and January-February the trough.
The following graph shows the new-home price premiums compared to existing home sales. The data are expressed as the trailing 12-month average to remove all of the seasonality aspects. At the peak of the housing bubble, new home prices were almost identical to existing homes, with new home prices less than 7 percent greater (6.8 percent). Following the implosion of the bubble, the only new construction was high-end or custom homes, as reflected in the almost 39 percent premium paid for new homes. Today, that premium has shrunk to just less than 21 percent as builders have expanded back into the entry-level housing market. Millennials in the past 12-months accounted for 37 percent of all existing home sales according to the National Association of Realtors. Millennials have been the primary homebuyer demographic in the U.S. for each of the past six years according to NAR.
Why Home Sales May Not Be Down 3.7 Percent Vs a Year Ago
New home sales are counted differently than existing home transactions. An existing home sale is tallied when the property actually closes and ownership transfers from the seller to the buyer. New home sales are counted at the time the purchase contract is signed. In some circumstances, construction may not have yet commenced and that specific transaction may not ever close. As a result, new home sales typically have revisions from one month to the next which are sometimes material in size.
The following table shows a random, non-representative selection comparing the preliminary release of new home sales to the restated values as of May 2019. These months were not selected statistically in a random and representative manner, but rather were merely months in which the original sales estimates were available on my computer. One month each year since 2010 was included. It shows the number of housing sales on a seasonally adjusted annualized rate (SAAR) expressed in thousands. Included also are the sales for the prior month and from 12-months ago – the latter two adjusted rather than preliminary estimates.
How to Read
In September 2010 the preliminary estimate was that 307,000 new homes sold on a SAAR. The month prior saw sales at the 288,000 level with a 405,000 sales volume on a SAAR in September 2009.
Restated Estimate as of May 2019
The latest estimate showed a 316,000 sales rate for September 2010 with a 278,000 sales volume for the month of August 2010 and 391,000 as of September 2009.
The next table takes the monthly number and compares it to the prior month using the Original Estimate and Restated new-home sales data. In September 2010, while the preliminary estimate was that sales were up 6.60 percent compared to the prior month (August 2010), using the latest restated-data shows sales were up 13.67 percent, which was a 7.07 percent increase. The largest change from the preliminary to the final estimate in these data occurred in May 2014, where the original estimate showed a 14.48 percent decline from the prior month and the revised data indicating an 11.46 percent increase – a net change from 25.94 percent.
The following table is similar to the prior, but rather than looking at the change from the prior month, it is based on the same period one year ago.
The final table shows the change in the original monthly estimate of new home sales to the latest as of May 2019. The Original Estimate for September 2010 was 307,000 which has since been revised to 316,000, an increase of 2.93 percent.
These differences are a function of using a relatively small sample to relate to a large population. The Census Bureau samples new home sales and from that forms an estimate of likely sales on a seasonally adjusted basis. In the latest release they stated the following:
These statistics are estimated from sample surveys. They are subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting, and undercoverage. Estimated average relative standard errors of the preliminary data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (‐0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90‐percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease. The same policies apply to the confidence intervals for percent changes shown in the tables. Changes in seasonally adjusted statistics often show irregular movement. It takes 4 months to establish a trend for new houses sold. Preliminary new home sales figures are subject to revision due to the survey methodology and definitions used. The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. An estimate of these prior sales is included in the sales figure. On average, the preliminary seasonally adjusted estimate of total sales is revised about 4.4 percent. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics. Explanations of confidence intervals and sampling variability can be found on our website.
To read the full press release from the U.S. Census Bureau click https://www.census.gov/construction/nrs/pdf/newressales.pdf
Using new home sales statistics as a directional signal for housing markets is akin to following the tip of a tail of a puppy dog to estimate where the dog is heading. Granted, existing home sales data from NAR are subject to updates, but the revisions are typically small. The greater volume of new home sales — with five to six existing home sales per new home transaction – makes existing home sales the choice metric for housing markets.