Most of the recent downturn in new-home sales may have been a statistical anomaly caused by builders reselling homes that buyers backed out of, according to the latest economic outlook report from the chief economist at Freddie Mac.
New-home sales dropped 4 percent in February, clouding the prospects for a housing market recovery implied by a 4 percent gain in sales of existing homes and a 5 percent increase in sales of existing condos and co-ops.
But the drop in new-home sales may have been misleading, because resales of homes with previously cancelled sales contracts are not reported as new-home sales or deducted from inventories.
Calibrating the impact of the resale of homes with previously cancelled contracts “suggests such sales may account for most of the recent reported downturn in sales, which bodes well for a gradual recovery in coming months,” the Freddie Mac Chief Economist Frank Nothaft wrote.
With rates on 30-year fixed-rate mortgages holding steady at a little more than 6 percent, and recent encouraging reports on job growth, “conditions are ripe for a firming in housing demand,” Nothaft said.
But housing supply “presents several challenges” to a recovery, Nothaft wrote in Freddie Mac’s April 2007 Economic Outlook.
The Census Bureau reported that inventory jumped to 8.1 months in February, a 16-year high. But statistics don’t reflect the impact of the cancellation of new-home contracts, which were as high as 30 percent at several major builders last year. It’s likely that last fall’s actual new-home sales were lower than reported, and inventories higher.
If resales are now outnumbering cancellations, they could be having the opposite impact on statistics, which “may understate any recent improvements in new-home sales and months’ supply,” Nothaft said.