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New Home Sales versus Housing Starts and Permits

Posted By Barry Ritholtz On December 23, 2005 @ 6:59 am In Real Estate | Comments Disabled

Today, we will get the first New Home Sales (at 10:00am) after the stupendous plus 13% number last month.  Recall our analysis of that back on November 30 [1] found two interesting wrinkles:

• a plus 13% is meaningless when the margin
of error is 17%;
• Historically (past 15 years) double digit gains are typically followed by flat to negative numbers.

Do note that New Home Sales are a very different animal than Housing Starts and Permits. The strong numbers we saw in Housing Starts and Permits are more reflective of how Builders do business than anything else. As I noted Wednesday [2]:

From clients in the Real Estate industry, I have learned that
Builders build — and keep building. They do not try to guess when the
cycle will end.

Why not? Look at their risk versus reward: If they guess wrong and
stop building too soon, they miss out on some of the boom. If they
build past the cycle’s end, they may get stuck with excess inventory,
forcing price cuts. But that usually means they are selling at a
smaller profit; they paid much less for the land (bought years prior);
it cost them relatively little to erect a house — materials plus
labor.

Even in the most severe slow down, the end game is merely the cost
of doing business, and hardly dents the accumulated profits of the
prior 3-5 years. So rather than just guess when the music will stop, they simply keep on building — until sales slow dramatically.

Bottom line: New home starts and permit apps are not a leading indicator of the housing cycle.

I expect New Home Sales today to be flat to negative  — consensus is -8%, or 1,300,000 annualized.

Because of the limitations in the data gathering — its a very small sample, with a large statistical error — we could just throw out the November data.

Instead, lets think of it in terms of reporting the two months together, and then averaging them. A plus 13% and a minus 8% gives us about a ~5% growth rate in New Home Sales, which seems about right . . .

 


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URL to article: http://www.ritholtz.com/blog/2005/12/new-home-sales-versus-housing-starts-and-permits/

URLs in this post:

[1] November 30: http://bigpicture.typepad.com/comments/2005/11/new_home_sales__1.html

[2] noted Wednesday: http://bigpicture.typepad.com/comments/2005/12/howz_real_estat.html

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