The Wall Street Journal

6 December 2013

A significant increase in new-home sales in October certainly sounds like good news for the U.S. economy. The trouble is that many economists, home builders and analysts regard it as too good to be true.

The U.S. Census Bureau reported Wednesday that contracts to sell newly built homes increased by 25.4% in October from the September figure to seasonally adjusted annual rate of 444,000. That’s on par with the sales rate of last spring when the new-home market was surging.

But the Census figures—based on a small sample and notoriously volatile—contradict the findings of monthly surveys by housing market analysis firms as well as recent comments by public home builders that October sales were tepid at best.

A monthly survey of builders conducted by research firm Zelman & Associates revealed a 9% decline in sales in October from a month earlier on an unadjusted basis. Even David Crowe, chief economist at the National Association of Home Builders, said the results of his proprietary monthly survey of builders “agrees” with the findings of the Zelman survey for October.

Public builders have said of late that October sales showed a small improvement from those of August and September. But that’s not saying much, since those earlier months were particularly weak.

Census on Wednesday said it lowered its previous sales estimates for the summer months, including a 1% reduction for June, 4.4% for July and 10% for August. September’s seasonally adjusted annual rate of 354,000 is the lowest of this year. Many observers expect the October estimate also will be revised lower when Census reports new figures next month.

It’s not that housing market observers don’t want to believe that new-home sales revived in October. Rather, they just don’t think the increase was as big as 25%.

“The market is stabilizing, but maybe it hasn’t come back to the degree that today’s data would suggest,” said Mark Zandi, chief economist for Moody’s Analytics.

Taylor Morrison Home Corp., the Scottsdale, Ariz.-based builder that sold 1,163 homes in five states in the third quarter, posted a slight increase in sales in October from a month earlier. August was the builder’s best month of the quarter for sales. “September was the slowest, and October started to pick up” as the fourth quarter started, Taylor Morrison spokeswoman Erin Willis said.

There are many culprits to blame for the slowdown in new-home sales since last summer. Foremost was the 1 percentage point rise in interest rates from May to September. Rates for a 30-year fixed-rate mortgage since have declined slightly to 4.29%, according to Freddie Mac.

No less of a factor were double-digit percentage increases in prices for new homes earlier this year. Census reported Wednesday that the average price of a new home registered $321,700 in October. That average has stayed above $300,000 for all of this year, putting it on par with prices in the headier market of 2006-2007.

Still, economists and builders see reason for optimism, albeit tempered. Some note that, since the two-week federal government shutdown ended in mid-October, general confidence in the economy has slowly increased. The slight pullback in interest rates likely spurred a few buyers off the fence in October and November.

“It’s more active now,” said Brendan Wright, a real estate agent at Atlanta Fine Homes Sotheby’s International. “There was so much activity in the spring and summer that the people who missed the boat then are circling back now as opposed to waiting for next spring.”

Alisa Poncher, director of sales at Oakwood Homes, a closely held builder based in Denver, said Oakwood had “good months” in October and November, selling 62 homes in the latter. “There is a little bit of a lack of urgency on the part of buyers right now,” Ms. Poncher said. “I think that it’s (because of) the holidays. And there is some uncertainty with interest rates, which scares people.”

Many analysts and economists expect that the national rate of new-home sales will increase next year from its current rate of 440,000 to closer to the normal average rate of roughly 800,000. But the monthly fluctuations of the Census figures make that trend difficult to discern in the short term. “We’re not reading much out of the (October) data, good or bad,” said Ivy Zelman, chief executive of Zelman & Associates. “It won’t be much of an indication of how the spring selling season will be.”