New Home Prices: More Room to Fall

Over the past 48 hours, the Census Bureau and the National Association of Realtors have announced new and existing home sales, respectively, for February. As expected (at Financial Armageddon, at least) neither set of data points offered any real encouragement for those who keep harping on about a recovery in the sector.

In fact, a comparison of annualized sales and median price trends for both data series reveals an interesting divergence -- one that suggests new home prices will need to fall by 15 percent from where they are now to entice buyers if the historical relationship between the two markets is anything to go by.

How did I arrive at this figure? I took the median differential (going back to 1999) between the monthly median prices for new and existing sales, or $23,000, and subtracted that from the latest reported differential, or $55,400. I divided the net result by February's median price for a new single-family home, or $220,500, and got just under 15 percent.

Of course, my approach might be way off base or overly simplistic, and I might not be taking proper account of structural differences between the two markets, including the possibility that the fallout from burgeoning foreclosures is having a more pronounced effect on the market for older, rather than newer homes.

Nonetheless, the fact that the new home construction industry remains fairly pessimistic about the outlook, as the National Association of Home Builder's confirmed when it announced a worse-than-expected reading for its Market Index earlier this month, lends some weight to the notion that new homes have not yet reached price levels that many in the current pool of prospective buyers find appealing.

Comments

[Dartdog]

THIS IS JUST PLAIN WRONG..,The average sold prices are just moved down since all high priced homes (new and used) are not selling.. The only new home builders active (with any brains) are selling to 1st time (low priced) Home buyers... see http://tbrander.wordpress.com for more....

[Mack]

Wouldn't the relationship between the cost of building the new home and the going price for existing come into play here somewhere. In other words, if the cost to construct new homes has fallen below the going price for a similar existing home (which has happened in some areas) then NO new homes are going to be built and there is no chance that the cost of new homes is to drop 15% in order to correct this. Instead, we would have to wait until the price of existing homes is near (one can argue how near) or above the cost of constructing the new home before any new construction takes place.

[NC Joe]

I don't think this gap is "real". Builders are hesitant to lower prices, which pisses off their former customers in the same sub-division, so they resort to all kinds of other promotions to effectively lower the cost for new buyers without lowering the final sales price. It is not uncommon to see offers of $30K or more in "free" upgrades, closing costs, interest rate buy-downs, etc. In this way they are able to compete with existing homes and maintain the appearance of price stability.

[Soup Party]

Debitores Caveatis

When governments around the world stop using inflationary liquidity to prop up prices on collateral for mortgage debt then people will start to buy new homes.

When you are certain that prices of un-depreciated new homes are about to take a dive will you buy old fully depreciated house or new overpriced home built with overpriced labor? After elections are wages also about to fall? With falling wages who will have the paycheck to overbid on new homes?

Think about it
!

[Tom T.]

It is a reasonable forecast, where prices begin to approach the long term (since 1840) mean. This forecast, for me, assumes gradual changes and no significant loss of confidence in the system. However the big factors of: interest rates, employment outlook, and perceived wealth (valuations of stock and bond markets) will impact the outcome significantly. It might be wise to recognize that the entire runup in home prices should be discounted, where a true bargain would be 15% or more below the mean.
The runup was ficticious value, that will dissapate entirely.
Therefore is also reasonable to expect an overshoot below the mean given the potential turmoil that lies directly ahead. I suspect a dramatic contraction in all these markets is likely as the realization that our debt situation far worse than most Americans realize. This will be the time speculators will step up to "buy America on the cheap".