New Home Sales as a New Home Sales as a Measure of Economic Well Measure of Economic Well

BeingBeing

Rabin SaidianRabin SaidianPatricia TrujilloPatricia Trujillo

Market IndicatorsMarket IndicatorsSpring 2007Spring 2007

“ “It is the policy of the United States to It is the policy of the United States to encourage, support, and promote the encourage, support, and promote the private ownership of property and to private ownership of property and to ensure that the constitutional and other ensure that the constitutional and other legal rights of private property owners are legal rights of private property owners are protected by the Federal Government.”protected by the Federal Government.”

- H.R. 4128, §10- H.R. 4128, §10

The emphasis of American culture on The emphasis of American culture on property ownership tells us that we can property ownership tells us that we can examine the real estate market and have examine the real estate market and have some idea about the state of the economy. some idea about the state of the economy.

New Home SalesNew Home Sales

•Published by: Bureau of the Published by: Bureau of the CensusCensus

•Frequency: monthlyFrequency: monthly

•Period Covered: prior monthPeriod Covered: prior month

•Volatility: highVolatility: high

•Market significance: moderateMarket significance: moderate

•Web site: www.census.govWeb site: www.census.gov

What is it?What is it?• Tracks how many new single-family Tracks how many new single-family

houses were sold throughout the United houses were sold throughout the United States during the previous month, a house States during the previous month, a house being considered “sold” when the contract being considered “sold” when the contract has been signed or a deposit has been has been signed or a deposit has been accepted.accepted.

• Data is collected through the Survey of Data is collected through the Survey of Construction, which surveys all the Construction, which surveys all the purchases of houses requiring a building purchases of houses requiring a building permit plus those not requiring one.permit plus those not requiring one.

What is in the Report?What is in the Report?

• Information about:Information about:– Number of houses sold for each region (South, Number of houses sold for each region (South,

West, North-east, Mid-west), in thousands.West, North-east, Mid-west), in thousands.– Month supply (i.e. how many months would the Month supply (i.e. how many months would the

inventory last at the going rate if no new inventory last at the going rate if no new houses are built)houses are built)

– Median Sales PriceMedian Sales Price– Average Sales PriceAverage Sales Price– Number of houses sold by type of financingNumber of houses sold by type of financing– Number of houses sold by sales priceNumber of houses sold by sales price

Why is it important?Why is it important?

• Highly volatile, leading indicator of Highly volatile, leading indicator of economic activityeconomic activity

• Houses are investment tools in addition Houses are investment tools in addition to commodities (due to the to commodities (due to the appreciation of land)appreciation of land)

• Consider that Y = C + G + I + NX; since Consider that Y = C + G + I + NX; since houses are generally very expensive houses are generally very expensive and call for extensive financing plans….and call for extensive financing plans….

Why is it Important?Why is it Important?

• … … the purchase of a new home increases C the purchase of a new home increases C significantly, causing an increase in Aggregate significantly, causing an increase in Aggregate Demand, ceteris paribus.Demand, ceteris paribus.

• Increased housing purchases are indicative of Increased housing purchases are indicative of increased consumer optimism about the future, and increased consumer optimism about the future, and vice versa.vice versa.

• In addition, because of the role of banks and lending In addition, because of the role of banks and lending institutions, purchases of new homes figure greatly into institutions, purchases of new homes figure greatly into the market for loanable funds. the market for loanable funds.

• Directly related to federal funds rateDirectly related to federal funds rate (i.e. increasing the rate decreases liquidity, making it (i.e. increasing the rate decreases liquidity, making it

more difficult to obtain loans and purchase new more difficult to obtain loans and purchase new homes).homes).

Keys to Interpreting the Keys to Interpreting the DataData• Be aware of seasonal fluctuations: housing Be aware of seasonal fluctuations: housing

sales increase during spring and summer, sales increase during spring and summer, decreasing during fall and winter.decreasing during fall and winter.

• The “annually adjusted rate” takes care of The “annually adjusted rate” takes care of these fluctuations, giving us a clearer these fluctuations, giving us a clearer depiction.depiction.

• This data focuses only on single-family, This data focuses only on single-family, residential units; commercial properties residential units; commercial properties are not included.are not included.

Latest ReleaseLatest Release

An annually adjusted rate of 858,000 new homes were sold in March 2007. This is 2.6% higher than the revised February 2007 figure of 836,000, but 23.5% below the estimated 1,121,000 homes sold in during March 2006.

The first estimate (2.6%) includes 0 in its confidence interval, signifying that this figure is not statistically significant; the 23.5% decrease, however, was statistically significant.

Additional Information about Additional Information about March 2007March 2007

• Median Sales Price = $254,000Median Sales Price = $254,000

• Average Sales Price = $330,900.Average Sales Price = $330,900.

• The current sales rate represents a The current sales rate represents a supply of 7.8 months. That is, if no supply of 7.8 months. That is, if no new houses are built, the “for sale” new houses are built, the “for sale” inventory would last 7.8 months.inventory would last 7.8 months.

Historical DataHistorical DataHouses sold per month, not seasonally adjusted, since Jan 1963

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Historical DataHistorical DataSeasonally Adjusted Annual Rate Since Jan 63

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A Closer Look at Recent Years (Since Jan 2000)

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Data AnalysisData Analysis

• Recent data indicate that the market for Recent data indicate that the market for new houses has been declining, which is new houses has been declining, which is symptomatic of a weakened economy.symptomatic of a weakened economy.

• Also, we note that the increase from last Also, we note that the increase from last month was not statistically significant, month was not statistically significant, while the decrease from last year was: while the decrease from last year was: this means that if we adjust for seasonal this means that if we adjust for seasonal fluctuations, the market has declined. fluctuations, the market has declined.

Data AnalysisData Analysis

• On the other hand, the figures may have improved On the other hand, the figures may have improved since last month, and the last chart we looked at since last month, and the last chart we looked at seems to have an upward-pointing “tip.” Also, a seems to have an upward-pointing “tip.” Also, a sudden decrease in the federal funds rate would sudden decrease in the federal funds rate would certainly cause inflation. certainly cause inflation.

• Therefore, on the basis of this indicator alone, it Therefore, on the basis of this indicator alone, it would seem that the Fed should wait a month or so, would seem that the Fed should wait a month or so, and if things get worse, it should gradually and if things get worse, it should gradually decrease the federal funds rate.decrease the federal funds rate.

• In fact, according to a recent Federal Reserve Press In fact, according to a recent Federal Reserve Press Release (May 9, 2007), the Fed did decide to keep Release (May 9, 2007), the Fed did decide to keep the rate steady at 5.25% until the economy sends the rate steady at 5.25% until the economy sends more signals about its well being.more signals about its well being.

• (Standing Ovation)(Standing Ovation)