Written by John Lounsbury and Steven Hansen

The headlines say new home sales improved. The median sales price for homes declined. The rolling averages declined. However the data was above market expectaions.

Analyst Opinion of New Home Sales

On the surface, this looks like the second good month - a good start for 2017? The problem is backward revision which keeps the rolling averages declining.

This data series is suffering from methodology issues which manifest as significant backward revision - and this month the revisions were mixed. Home sales move in spurts and jumps - so this is why we view this series using a three month rolling average (rolling averages declined}.

Econintersect analysis:

• unadjusted sales growth accelerated 3.8 % month-over-month.
• unadjusted year-over-year sales up 8.9 % year-over-year. Year-over-year growth rate this month was below the range of growth seen last 12 months.
• three month unadjusted trend rate of growth decelerated 0.4 % month-over-month - is up 4.9 % year-over-year.

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US Census Headlines:

• seasonally adjusted sales up 6.1 % month-over-month
• seasonally adjusted year-over-year sales up 12.8 % (last month was reported at +5.5%)
• market expected (from Bloomberg) seasonally adjusted annualized sales of 550 K to 600 K (consensus 565 K) versus the actual at 592 K.

The quantity of new single family homes for sale remains well below historical levels.

Seasonally Adjusted New Homes for Sale

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The headlines of the data release:

Sales of new single-family houses in February 2017 were at a seasonally adjusted annual rate of 592,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.1 percent (±17.3 percent)* above the revised January rate of 558,000 and is 12.8 percent (±18.0 percent)* above the February 2016 estimate of 525,000.

Unadjusted New Home Sales Monthly Volumes In Thousands

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The median sales price of new houses sold in February 2017 was $296,200. The average sales price was $390,400.

Unadjusted Median New Home Sales Price

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The seasonally-adjusted estimate of new houses for sale at the end of February was 266,000. This represents a supply of 5.4 months at the current sales rate.

Seasonally Adjusted - Number of Months of Supply of New Homes at Current Rate of Sales

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Caveats on Use of New Home Sales Data

This data is compiled by sampling, and historically has little revision. This data is based on contracts signed - not actual properties conveyed.

To provide nationwide coverage of building activity, a multi-stage stratified random sample procedure was used to select approximately 900 building permit-issuing offices, and a sample of more than 70 land areas not covered by building permits.

Each month, for permit-issuing places, a sample of residential building permits is selected from each of the sampled permit offices. The probability of selecting a permit is proportional to the number of units authorized by the permit. Permits for one-to-four-unit buildings are sampled at an overall rate of 1 in 50. All permits authorizing buildings with 5 or more housing units in the sampled permit offices are selected.

Each month, for areas that do not require building permits, field representatives conduct a road canvass in each of the sampled non-permit land areas to identify the start of new buildings. All new residential buildings found are selected for the survey.

Once a permit or building is selected, a field representative contacts the owner or builder, by telephone or in person, to conduct the interview each month as necessary. Contact continues until the project is either completed or abandoned. If a single-family home is not sold by the time of completion, the project will continue to be followed until the sale occurs. Each month, interviews are required for about half of the buildings currently being followed up.

Each month, housing starts, completions, and sales estimates derived from this survey are adjusted by the total numbers of authorized housing units (obtained from the Building Permits Survey) to develop national and regional estimates. Estimates are adjusted to reflect variations by region and type of construction, and to account for late reports and houses started or sold before a permit has been issued. Reported data are seasonally adjusted. The Construction Methodology (PDF) document contains further information.

As in most US Census reports, Econintersect does not agree with the seasonal adjustment methodology used and provides an alternate analysis. The issue is that the exceptionally large recession and subsequent economic roller coaster has caused data distortions that become exaggerated when the seasonal adjustment methodology uses several years of data. Further, Econintersect believes there may be a New Normal seasonality and using data prior to the end of the recession for seasonal analysis could provide the wrong conclusion.

Econintersect determines the month-over-month change by subtracting the current month's year-over-year change from the previous month's year-over-year change. This is the best of the bad options available to determine month-over-month trends - as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).

It is more informative to look at these changes over the nearly fifty-year history. The following graph shows new home sales normalized to population from from St, Louis Fed:

Seasonally Adjusted New Home Sales Ratio to Population

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The same data is plotted below to include the average for the entire period and two moving averages (graph updated through October 2011):

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The bottom line is that the new home market is in an extreme depression and the apparent bottoming process has been dragging on for two years, if in fact the bottom has been reached. Recent review of the Fed 2011 stress tests for banks has a new recession scenario that would see home prices decline another 20% from here. It is unlikely that the attempts to complete a bottom here could hold under those conditions. Econintersect analysis of recession indicators is still not seeing the start of new U.S. recession, however. We can only hope that outlook continues.