Friday, December 23, 2005

New Home Sales Plunge

If there is a bubble, this is how it starts. With an increase in housing production, an increase in prices, (LA's Median home price shot up 16 percent this past month) and a decline in sales (.pdf).

Here's CNN's take on the drop in house sales. Note that the word "bubble" isn't mentioned until the fifth paragraph from the end:
NEW YORK ( - Sales of new homes tumbled 11 percent in November, the biggest drop in more than a decade, in another sign pointing to a slowdown in the nation's real estate market.

The decline, which was larger than forecasts from Wall Street economists, was from record sales in October. The last time there was an 11 percent drop in new home sales was February 1995.

The Census Bureau reported Friday that the annual pace of new home sales dipped to 1.25 million in November from the record high of 1.4 million in October, which was revised slightly lower. Economist surveyed by had forecast sales would slow to a 1.3 million annual rate.

Some of the big drop may be due to the October report being somewhat of an aberration. Many real estate economists questioned the validity of the 13 percent jump in new home sales in that earlier reading, the biggest spike in sales in 12 years. Forecasts had been for a slight decline.

But those questions aside, there have been growing signs of a cooling real estate market in recent months due to rising mortgage rates, which boost the cost of buying a new home.

Mortgage financing firm Freddie Mac said 30-year, fixed-rate mortgages averaged 6.33 percent in November, up more than a half of a percentage point in just two months, and the highest level since July 2002.

Sales of new homes, while a small part of the housing market, are seen as more of a leading indicator than existing home sales.

That's because existing home sales are tallied based on closings, which usually occur a month or two after contracts are signed and mortgage rates are locked in. New home sales are based on contract signings, which can often be before construction begins.

Meanwhile, the debate rages over whether there's a bubble in the market that's likely to pop, sparking big declines in home prices, or whether there will simply be a gradual slowdown in the market.

The latter scenario would probably slow price appreciation and lead to scattered price declines in some markets next year.

The latest report shows prices for new homes down slightly from October, although they were up modestly from a year earlier.

— The Boy in the Big Housing Bubble