New Home Sales Fall, But Outlook Still Positive

Last month’s miserable reading for New Home Sales (as measured by government trackers in June) was revised upward as we expected, but the July number fell 2.4%. This decline is relatively modest, and the stated confidence interval for the 2.4% drop was plus or minus 11.9%, which means that the government isn’t sure whether new home sales actually rose or fell.
In order to understand what is going on, let’s take a look at what we are hearing around the country. Builders were mostly unimpressed by the spring selling season, which we predicted would be “good, but not great.” The summer was equally disappointing. Our weekly surveys of hundreds of builders nationwide show that in many markets “traffic” is strong, but traffic “conversions” are low. In everyday parlance: people are coming in to the builders’ showrooms, but many of them are hesitant to sign on the dotted line. This time of year was slow last year for conversions (depressed by the “taper talk” and an uptick in rates), but consumer confidence seems to be slightly worse this year. Of course, new home prices are significantly higher than this time last year. (The “sticker shock” we have been talking about for 12 months now is still a deterrent).
What do the next few months hold? Job growth is improving, and we are seeing signs that some 30-year-olds living with their parents are going off and getting their own place, but that mostly affects the rental market, at least for now. Retirees are showing more interest in buying, and many of them clearly have the cash to get the home that they want. What is needed, though, in order to get significantly improved new home sales numbers, is increased activity in the entry-level new-home market. And as you think about this segment, remember that entry-level does not mean only first-time home buyers. An entry-level NEW home might be a move up from a resale home.
Our forecast is still for gradual improvement in new home demand through the rest of this year, picking up more momentum as we head into 2015.

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