Washington: A report released by the Commerce Department on Friday showed a much bigger than expected increase in U.S. new home sales in the month of February as well as substantial revisions to the previous data.
The Commerce Department said new home sales surged up by 4.9 percent to an annual rate of 667,000 in February from the revised January rate of 636,000. Economists had expected new home sales to increase by about 1.3 percent.
The report also showed the 6.9 percent plunge in new home sales originally reported for January was revised to an 8.2 percent spike, although the jump in new home sales in December was also revised to a 3.9 percent slump.
With the increase in February, new home sales are at their high level since hitting a rate of 672,000 last March and up 0.6 percent compared to the same month a year ago.
New home sales in the Northeast and Midwest soared by 26.9 percent and 28.3 percent, respectively, while home sales in the South climbed by 1.8 percent and home sales in the West were unchanged.
The Commerce Department also said median sales price of new houses sold in February was $315,300, up 3.8 percent from $303,900 in January but down 3.6 percent from $327,200 in February of 2018.
The estimate of new houses for sale at the end of February was 340,000, representing 6.1 month of supply at the current sales rate.
New Home Sales vs Existing Home Sales
New home sales and existing home sales are released each month at about the same time. Many comparisons are made between the two series, but before doing any comparisons, one must be aware of some definition differences that affect the timing of the statistics.
The Census Bureau collects new home sales based upon the following definition: “A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit.” The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction.
Existing home sales data are provided by the National Association of Realtors®. According to them, “the majority of transactions are reported when the sales contract is closed.” Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.
Given the difference in definition, new home sales usually lead existing home sales regarding changes in the residential sales market by a month or two. For example, an existing home sale in January, was probably signed 30 to 45 days earlier which would have been in November or December. This is based on the usual time it takes to obtain and close a mortgage.
Effective with January 2005, the National Association of Realtors created a new monthly series to overcome the lagging effect of the existing home sales definition. This new series is called Pending Home Sales and is based on sales of existing homes where the contract has been signed but the transaction has not been closed, making it roughly equivalent to the new home sales definition. Monthly estimates are expressed as an index where the year 2001 has been set to equal 100.0.
New Home Sales vs New Residential Construction
The numbers of new single-family housing units started and completed each month are often larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series. New residential construction is categorized into four intents, or purposes:
Built for sale (or speculatively built): The builder is offering the house and the developed lot for sale as one transaction this includes houses where ownership of the entire property including the land is acquired (“fee simple”: as well as houses sold for cooperative or condominium ownership. These are the units measured in the New Residential Sales series.
Contractor-built (or custom-built): The house is built for the landowner by a general contractor, or the land and the house are purchased in separate transactions.
Owner-built:The house is built entirely by the landowner or by the landowner acting as his/her own general contractor.
Built for rent: The house is built with the intent that it be placed on the rental market when it is completed.
Why Markets Care About New Home Sales (New Residential Sales)
New Home Sales (Also Called New Residential Sales) measures annualized number of new single-family homes that were sold during the previous month; It is released monthly, about twenty five days after the month ends.
While this is monthly data, it’s reported in an annualized format (monthly figure x12).
The usual effect is that ‘Actual’ greater than ‘Forecast’ is good for the dollar and vice versa.
New Home Sales is a leading indicator of economic health because the sale of a new home triggers a wide-reaching ripple effect. For example, furniture and appliances are purchased for the home, a mortgage is sold by the financing bank, and brokers are paid to execute the transaction.