The Latest on New Home Sales: More Questions than Answers

The market for new homes is proving as unpredictable as an upset-laden NCAA Tournament bracket.

The latest report on new home sales from the US Census Bureau brought doubly disappointing news: a downward revision of the original estimate for January's sales, and a slowdown of sales in February. This is just the latest reversal in the course of the market for new homes.

The latest on new home sales

The US Census Bureau reported that new homes sold at an annual pace of 440,000 in February, a level below both January's figure and the pace of sales from a year ago. That January figure, in turn, was revised downward from the original estimate. With a drop of 13,000 from the original estimate of new home sales, January's pace of 455,000 went from appearing to be the best in five years to being a number that could not even beat the prior January's.

These recent disappointments are just the latest in a series of twists in the course of the market for new houses. After building steadily over the prior two years, the pace of new home sales dropped abruptly in the middle of last year. This came right after a steep rise in mortgage rates - particularly for the most popular 30-year fixed mortgage rates. However, the market appeared to shake this off and begin to recover, before losing steam again in the last two months of 2013. Then, January's figures provided a glimmer of hope, but that hope was disappointed by February's figures.

The news is particularly grim in the Northeast. Already the nation's weakest housing market, the Northeast saw the annual pace of new home sales decline to just 23,000 in February, a 32.4 percent decline from January and a 34.3 percent decline from February of 2013.

A long string of questions

A sustained rally or slump in new home sales provides a certain clarity about the state of the market; in contrast, the zigzag pattern of recent months provides more questions than answers. Here are some of the prominent questions:

  1. How dependent was the market on low mortgage rates? The market for new home sales first started to lose direction around the middle of the year. This was shortly after 30-year fixed mortgage rates rose by a full percentage point in less than two months, according to figures from mortgage finance company Freddie Mac. The Federal Reserve encouraged super-low mortgage rates as a temporary measure to get the housing market going again. However, if that market proves to be fully dependent on extraordinarily low mortgage rates, it may be like an intensive care patient who cannot survive without life support.
  2. Will Fed policy drive rates higher? The housing market's level of dependency on low mortgage rates is a critical question because the worst may not be over for mortgage rates. In its most recent meeting, the Fed confirmed that it would continue to taper back on quantitative easing, which is the program that helped bring mortgage rates down to record levels.
  3. How much did the weather impact sales? Maybe the slump in sales is just due to a particularly harsh winter. While the figures are adjusted for normal seasonal variations, it is entirely possible that this winter had a greater-than-normal impact on sales.
  4. What will lenders do to pick up the slack from refinancing? Mortgage lenders will feel the pinch from slower new home sales on top of the fact that higher refinance rates have choked off the refinancing market. They could compensate by easing qualification standards for new borrowers, though as long as home prices hold up, they may instead target existing home owners for home equity loans.
  5. Is excess supply starting to soften prices? According to the Census Bureau report, over the past year the supply of new homes on the market has climbed from a 4.1 months' supply to a 5.2 months' supply. That same time period has seen the median sale price of new homes slip from $265,100 to $261,800.

The answers to these questions will start to play out over the next few months, but in the meantime the direction of the housing market is uncertain. Buyers may want to take advantage of some softness in the market by driving a hard bargain - especially in the Northeast, where sales are really lagging. Sellers, on the other hand, should be ready to make reasonable concessions that can clinch a deal, but should not be anywhere close to panic mode.

One way or another, all the confusion of the NCAA Tournament gets resolved by early April. It will be interesting to see if the muddled trajectory of the housing market has sorted itself out by April as well.

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