Dramatic Drop in New Home Sales as Prices Plummet

September new home sales were revised substantially lower, from 770k to 716k. New home sales in October were expected to decline to 750k, but actually fell to 728k. But because of the dramatic revisions lower in September, the October sales pace actually indicates a rebound of +1.7% MoM versus the original estimate of a decline of -2.6% MoM. Net, new home sales have fallen more dramatically over the past two months than originally forecast. The drop to a 716k annual pace in September represents a 12 year low in sales. New home sales have fallen 24% YoY.

The median price of a new home dropped 13%, the largest decline since 1970, to $217k. This level compares with a median price of existing home prices announced yesterday of $207k, which represented a 5.1% YoY decline in value. It is important to point out that these house prices are not directly comparable month to month because the mix of homes and regional sales changes monthly, which makes these data of questionable value versus a more rigourus survey such as the Case-Shiller index which compares repeat sales of the same homes.

The actual inventory of new homes for sale fell 2.3% to 516k homes. This indicates a supply of 8.5 months of homes at the current sales pace, down from 9 months in September. Only the West saw a drop in new home sales in October (-16% MoM), while the Midwest saw an increase of +14% MoM, and the South rose +6.8% MoM and the Northeast lagged at +1.8% MoM. The four month decline in inventories is a positive sign, as it indicates that builders are reducing new supply to reduce the inventory overhange. This is one of the first steps required to get supply and demand back in balance, along with house price declines. Most economists are now look for a total national peak to trough decline in house prices of around 10-15%.

As Fed Vice Chairman Kohn said yesterday, "The housing sector has continued to decline and erode at a very, very rapid rate..." Most economists are looking for further declines in sales and house prices to eliminate the excess inventories. This will become harder to accomplish as the credit crunch continues, and lending standards remain tight. New home sales are considered to be one of the more timely indicators of home buying interest than exisiting home sales, but only account for about 15% of total home purchases. Residential construction has been contracting since early 2006.