Economists at the National Association of Home Builders say it takes six months to identify a trend, but new home sales are definitely slowing down. The question is will the pullback be temporary?
New home sales data is volatile anyway, with sales impacted strongly by the availability and cost of materials, land and consumer demand. Weather plays a big role in second-guessing the housing market. Warm weather in January could prop up the housing market in some areas, but so far, the data points the other way.
The Census Bureau reported that new homes sold at an annual rate of 1.23 million homes in January, down from 1.3 million sold in December. That's less than Wall Street was expecting.
But is it the calm before the storm? Home builders are reporting an increasing number of cancelled new home orders. A survey by The National Association Of Home Builders said that one in five members are reporting more cancellations than six months ago, and four percent of home builders surveyed said the increase in cancellations has been significant.
Typically, new home cancellations can be explained by job loss. If job growth slows, or people feel in jeopardy of losing their jobs, they will tend to back away from high-ticket purchases such as homes, cars and appliances.
But the home builders found that only 15 percent of homebuyers cancelling their contracts cited job losses as the cause. Forty-five percent of home buyers said their cancellation was due to an inability to sell their existing home. One-third said they were not being able to qualify for financing due to rising mortgage rates.
But NAHB Chief Economist David Seiders and others believe there is another reason for cancellations not included in the survey -- that real estate investors who are ordering new homes with the intention of selling them quickly in a hot real estate market are starting to pull out of the real estate market.
If speculators are pulling out of the new home market, is demand still strong with homebuyers who intend to occupy their homes?
Toll Brothers, a national luxury builder, said that not only is the company seeing investors bail out of some markets, but new signed contracts are also falling -- 21 percent compared to a year earlier.
Experts believe that the home buyer intending to live in a home is reluctant to cancel an order, even if the market seems to have softened, but speculators will gladly leave deposits on the table if they think they will more money by staying with the investment. The exit of any large number of buyers is going to have a negative impact on the market, driving home prices downward.
"If you've overbuilt the market and sales get cancelled, you have to do something with the homes," said Seiders. "The incentives we're seeing builders offering are clearly designed to support prices and stop cancellations."
New home supplies have reached 5.2 months of inventory on hand. That means it will take approximately 5 months to sell through existing inventories to zero homes on hand. New home builders are quick to slow down building new homes in order to let standing inventory get absorbed by the marketplace, so absorption should be fairly quick. If home cancellations continue and new orders don't pick up again, then home builders will have reason to worry.
On the other hand, if the slowdown is only temporary, another housing boom could be triggered, particularly if there is nowhere else investors prefer to put their money.
