Let’s take another crack at making some sense of the numbers released in yesterday’s New Home Sales Report.The most notable figures released in the report were the 10.9% decline in median selling price and simultaneous 16.2% jump in the number of sales.
Revisions notwithstanding, these figures seemed to indicate that declining prices are now driving greater number of sales.
Although it’s likely true that lower prices are, in fact, spurring on sales, it’s important to look at the distribution of sales activity in order to gain a truly accurate sense of how the housing markets are changing.
It’s also important to understand that the “headline” new home sales number is essentially an estimated count of the number of homes sold during a given month regardless of price.
As we all know very well, home prices have increased dramatically in recent years, and new homes, especially in the bubbliest markets, are very expensive.
In order to really understand what’s happening in the market, as well as make the sentiment and results provided by luxury homebuilders like Toll Brothers (NYSE:TOL) and Hovnanian (NYSE:HOV) “jive”, we need to examine the home sales results by particular price ranges.
Luckily, the Census Department also publishes the price range breakdown and sales counts of the home sales that are used to formulate the overall “headline” total home sales number.
First, let’s examine the following chart that shows home sales counts for four separate price ranges since January 2000 (click ALL charts for larger versions).
Note, the data has been smoothed using a six month moving average so as to make the trends a bit more obvious.
Notice that in 2000, the majority of new homes sold were priced at or less than $150,000 and the minority of new homes sold were priced at or above $300,000.
Notice also, that some time in 2005, this relationship reversed.
That is, in 2005, the distribution of home sales exactly flipped, the lowest priced homes showed the lowest number of sales while the highest priced homes showed the highest number of sales.
Although, this change can obviously be explained by a number of factors including increasing prices, changes in buying patterns and builder products, it represents an important shift in the market that may, or may not be fundamental and long lived.
Now, look at the following chart which shows the same four price ranges, unadjusted and un-smoothed, since January of 2006.
Notice that during the course of the housing slowdown, the numbers of homes sold in each price range appears to be beginning to converge.
That is, the number of homes sold in the top two price ranges are trending down while the number of homes sold in the bottom two prices ranges are flat to recently trending up.
This may indicate that the distribution flip that occurred in 2005 and still exists today, is likely in the process of reverting.
Notice also, that April 2007’s data showed the largest simultaneous decline in the top two ranges and “incline” to the bottom two.
This explains why there was such a dramatic increase in sales and simultaneous decline in median price.
There was a surge in the number of new homes sold below $199,999 and a slump in homes sold at or above $200,000.
Another way to look at this data is to visualize the “market share” of homes sold per each of the four price ranges.
The following chart shows the share of each price range out of a total of 100% of all unadjusted new home sales.
Notice again how the market share has changed since 1999 when the lowest priced homes showed the largest percentage of home sales and the highest priced showed the smallest.
Also note that in April 2007 (all the way to the right), the bottom three ranges are increasing in market share while the share of homes sold at or above $300,000 is decreasing.
Aside from all this, let’s remember that, in general, new homes, particularly the “McMansions” commonly seen in the luxury developments of the nations bubbliest areas, are very expensive.
In order to really make the new home sales numbers “jive” with the outlook and results reported by home builders like Toll Brothers (NYSE:TOL), Hovnanian (NYSE:HOV), and KB Home (NYSE:KBH) we are going to need look ONLY at the top price range of homes priced at or above $300,000.
As you can see, there was a considerable expansion of homes sold in the top price range which peaked in August of 2005 and has been heading down precipitously ever since.
