Why new-home sales drop was a shock

John Dimsdale Dec 23, 2009
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Why new-home sales drop was a shock

John Dimsdale Dec 23, 2009
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KAI RYSSDAL: This was one of those days where the economic statistic du jour just made you want to say, “C’mon, man, how’re we supposed to know what’s going on when we get numbers like these?”

The Commerce Department reported this morning that sales of newly-built houses fell more than 11 percent last month. Fell, as in went down. Came as quite a surprise, too. Because the experts who get paid to figure this stuff out had been expecting a 5 or 6 percent increase in new home sales. And oh, by the way, the used home number we got yesterday was quite healthy, thank you very much.

Our Washington bureau chief John Dimsdale explains why and how everybody got it so wrong.


John Dimsdale: There are plenty of reasons to think new homes should be selling. Prices have come down, interest rates are at record lows, first-time buyers get tax incentives. Yesterday, we learned that existing home sales jumped a healthy 7 percent in the same month.

So today’s decline left housing economist Lawrence White at NYU’s Stern School of Business at a loss.

Lawrence White: At the end of the day, I think, you know, we’re basically just scratching our heads. We don’t have a great explanation. This may just be a one month anomaly.

But another expert, Jared Franz at T. Rowe Price, has a personal experience that may explain what’s going on. He and his wife recently bought a used home, after looking at new ones.

Jared Franz: One of the reasons was because we had more negotiating power. We knew that it was a foreclosure. On the other hand, when we went to look at new homes, builders were very firm not wanting to cut prices. So I think there’s a negotiating power that you have, that you can really negotiate hard on an existing home.

Foreclosures are boosting the availability of affordable used homes. But new home construction has been at a stand still. Inventory is now the lowest since the early 1970s. Scarcity keeps sellers from bargaining.

One more anecdotal trend: Franz says new homes are usually built where land is cheaper, outside the city.

Franz: We figured we wanted to downsize and commute to work, have a shorter commute. So we were willing to go into an existing home rather than purchase far out in the suburbs.

Home builders blame the lack of sales on high unemployment and a slow recovery. Housing economists say one month does not make a bearish trend. They’re still expecting a sustained housing rebound, although it may take springtime temperatures to get people in a buying mood.

In Washington, I’m John Dimsdale for Marketplace.

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