New home sales: Meaning, Criticisms & Real-World Uses

Hidden LINK_POOL:

What Is New home sales?

New home sales, also known as new residential sales, is a key economic indicator within the housing market that quantifies the number of newly constructed single-family homes for which a sales contract has been signed or a deposit has been accepted. This data provides valuable insights into the health of the broader economy, belonging to the category of economic indicators. The report on new home sales tracks the sale of single-family homes, encompassing residential structures designed for one family, regardless of their stage of construction. It includes sales of homes not yet started, under construction, or already completed⁵³, ⁵⁴.

History and Origin

The collection and publication of new home sales data in the United States are a joint effort by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD). This monthly report measures the sales of new single-family houses across various regions of the United States, including the Northeast, Midwest, South, and West⁵⁰, ⁵¹, ⁵². The data for new home sales is compiled through surveys conducted among homebuilders and information gathered from the U.S. Census Bureau's Survey of Construction⁴⁹. This systematic collection began decades ago to provide a consistent snapshot of housing demand and its contribution to economic activity. Official statistics and historical data series for new home sales are publicly available through sources like the Federal Reserve Bank of St. Louis (FRED) - New Privately-Owned Housing Units Sold.

Key Takeaways

New home sales measure the number of newly built single-family homes sold in the United States.
The report is jointly released monthly by the U.S. Census Bureau and the Department of Housing and Urban Development.
It serves as an important indicator of consumer demand, consumer confidence, and the overall health of the real estate sector.
Data included in the report are the number of homes sold, the inventory of unsold homes, and median and average sales prices⁴⁶, ⁴⁷, ⁴⁸.
Changes in new home sales can signal shifts in economic growth or potential economic slowdowns⁴⁵.

Interpreting the New home sales

Interpreting new home sales data involves analyzing the reported figures and understanding the factors that influence them. A higher number of new home sales often indicates a strong economy, reflecting healthy consumer spending and confidence in future earnings⁴³, ⁴⁴. Conversely, a decline in new home sales can be an early indicator of an economic slowdown⁴².

The report typically provides a seasonally adjusted annual rate, which helps remove the effects of seasonal weather or the overall business cycle, providing a clearer picture of underlying demand⁴¹. Analysts also look at the median and average sales prices of new homes, as well as the months' supply of unsold homes. An increasing months' supply suggests an oversupply relative to current sales rates, which could lead to price adjustments or a slowdown in construction³⁹, ⁴⁰. Key economic factors such as interest rates, unemployment rate, and household income directly impact new home sales³⁷, ³⁸.

Hypothetical Example

Consider a scenario where the monthly new home sales report for June indicates a seasonally adjusted annual rate of 627,000 units, according to estimates released by the U.S. Census Bureau and HUD. This figure is slightly above the previous month's rate of 623,000, but 6.6% below the rate from June of the previous year³⁵, ³⁶.

At the same time, the median sales price for these new homes is reported as $401,800, a decrease from the previous month and the prior year³³, ³⁴. The inventory of new houses for sale at the end of June stands at 511,000, representing a 9.8-month supply at the current sales rate³¹, ³².

In this hypothetical situation, while there was a slight month-over-month increase in new home sales, the year-over-year decline, coupled with a growing inventory and falling median prices, suggests that affordability challenges and elevated mortgage rates may still be limiting purchasing power for many buyers³⁰. This indicates a potentially cautious outlook for the housing market despite some seasonal expectations for growth.

Practical Applications

New home sales data is a critical metric used across various sectors of the economy. In investing, it helps individual and institutional investors assess the profitability and growth prospects of companies in the construction and real estate industries, influencing investment decisions in homebuilders, building material suppliers, and financial institutions²⁹.

For market analysts, new home sales figures provide an important snapshot of market sentiment and consumer demand for newly constructed housing, reflecting homebuyers' confidence in the economy and their ability to secure financing²⁸. Economists and policymakers utilize this data to gauge the overall health of the economy, as the housing market can contribute significantly to a nation's gross domestic product (GDP), accounting for nearly 15% of the U.S. GDP²⁶, ²⁷. A strong housing market, driven by new home sales, can indicate increased job creation within the construction sector and higher consumer spending on related goods and services like furniture and appliances²⁴, ²⁵.

The data is publicly available, with detailed reports provided monthly by the U.S. Census Bureau New Residential Sales. Industry organizations like the National Association of Home Builders also publish analysis on the data, often highlighting trends in affordability and inventory.

Limitations and Criticisms

While new home sales data is a valuable economic indicator, it has certain limitations that warrant careful consideration. The statistics exclude new houses not built for immediate sale, such as those commissioned by a purchaser on their own lot²³. Unlike other construction statistics, like housing starts and building permits, which capture nearly all new residential construction, new home sales only count homes where a sales contract is signed or a deposit is made, even if the house is in an early stage of construction²¹, ²².

Furthermore, the reported sales figures are not adjusted for contracts that are subsequently canceled by either the customer or the builder. Although a canceled house is not recounted upon a subsequent sale to another customer, the initial inclusion of a canceled sale can introduce some noise into the preliminary data. The preliminary figures are also subject to revision as additional data becomes available, which can sometimes lead to significant adjustments from initial estimates²⁰. Some experts have expressed concerns about the quality of U.S. economic data, including survey response rates, which can impact the accuracy and reliability of preliminary reports¹⁹.

New home sales vs. Existing home sales

New home sales and existing home sales both provide crucial insights into the housing market, but they measure different segments. New home sales refer to the sale of newly constructed single-family homes, recorded when a sales contract is signed or a deposit is taken, regardless of the construction stage¹⁸.

In contrast, existing home sales involve previously owned homes, including single-family homes, condos, and co-ops. These sales are recorded upon the completion of the closing process, which typically takes 30 to 60 days after a contract is signed¹⁷. Because of this difference in definition and reporting, new home sales data tends to be a leading indicator, often reflecting changes in the residential sales market a month or two before existing home sales figures. Existing home sales do not directly contribute to gross domestic product (GDP) in the same way new home construction does, though they do impact broader economic demand through related spending¹⁶. The National Association of REALTORS® publishes existing home sales data, providing a complementary view of the housing market alongside the new home sales report from the U.S. Census Bureau. A Reuters on US existing home sales article further highlights ongoing challenges in that segment.

FAQs

What is included in the new home sales report?

The new home sales report provides data on the number of new single-family houses sold, the number of houses on the market, and the median and average new home sales prices.¹⁴, ¹⁵ It also includes a chart depicting yearly sales trends.¹³

Who publishes the new home sales data?

The new home sales report is jointly published monthly by the U.S. Census Bureau New Residential Sales and the U.S. Department of Housing and Urban Development (HUD).¹¹, ¹²

Why are new home sales considered an important economic indicator?

New home sales are closely watched because the housing market accounts for a significant portion of the gross domestic product (GDP).⁹, ¹⁰ Strong new home sales can signal increased consumer confidence, job growth, and overall economic expansion, as new construction creates jobs and leads to additional consumer spending on home-related goods and services.⁷, ⁸

How do interest rates affect new home sales?

Interest rates, particularly mortgage rates, have a significant impact on new home sales. When mortgage rates increase, the cost of borrowing for homebuyers rises, which can discourage potential buyers and lead to a decrease in demand for new homes. Conversely, lower mortgage rates can boost sales by making homeownership more affordable.⁵, ⁶

What is "months' supply" in the context of new home sales?

Months' supply is a key metric in the new home sales report that indicates how long the current inventory of homes for sale would last at the current sales rate if no additional new houses were built.³, ⁴ It is calculated as the ratio of houses for sale to houses sold. A higher months' supply generally indicates an oversupply and can suggest a cooling housing market where supply and demand are out of balance.¹, ²