New Home Sales Need A Strong Total Report

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From  my 2015 Housing Prediction Article

“You get my drift: The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds”

If you listen to the marketplace this year, it seems like housing is booming again. New home sales are rising double digits and the Builder Index is smoking hot this year.

While we were due for growth in 2015, for context, recall the  title of my 2015 Housing Prediction Article:

2015 Housing Predictions: The Bar Is So Low We Might Trip On It:     This still holds true.

For new homes, I predicted 8% -12% growth with some upside capacity if median prices fell –which means either home builders discounted to the high end buyer or that the make up shift of sales had some smaller sized homes.

Since we are getting lower revisions, we can assume that the more aggressive sales estimates won’t happen this year.

As you can see from the charts below, the year over year numbers are still strong but only because 2014 was a major whiff– in year 6 of the economic with rates falling and inventory rising.

From Calculated Risk: A must follow
http://www.calculatedriskblog.com/

May Data Line & June Data Line with revisions

NHS20142015May2015

NHS20142015June2015

We heard estimates of 24% – 41% growth in new home sales demand for 2015.   In a “normal economy, this would be a good bet because last year was such a miss.

However, if we get another soft reading in the next report, with more lower revisions, then  expect more revisions lower for total new home sales for 2015.

Austin Kilgore Editor in Chief of @NatMortgageNews reports that Wells Fargo does expect to see a 550K total home sale level. Now, unless we get major positive revisions and strong 2nd half demand that sales number needs to revised lower

WELLS

  On the other hand, tomorrow’s existing home sales report should beat expectations. In the present economy existing homes have at least two major advantages:

1. New Homes sales are 1/10th of all sales but are much more expensive in a 90% mortgage market place. So, price and rates combo matters.

2. Existing home sales which are 90% of the market place but have less economic output than new homes are not only cheaper compared to existing homes but have a geographic advantage than a new home. What I mean by that is that
new homes are clustered in an area of city where exiting inventory can be spread around the map.
This means for a mortgage buyer, there is more value  in a less expensive older home. I do believe this is the reason on the margins  why new home sales, even with it’s very low bar set in this economic cycle, has had trouble gaining traction.

Having said that I expect that we will see better growth in 2015 compared to last year, regardless of what happens in the next new home sales report. I predict 8%- 12% year over year growth and good shot to theupside if median prices fall.

In a nutshell, the market place is telling to us, that if we get a softer new home sales report, look for revisions to total new home sales, making it the 3rd year in a row that new home sales missed sales expectation. What we have to understand better is why is this happening in year 7 of the economic cycle with rates below 4.125% the entire year.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com