Posted in National Housing Market | Posted on 04-23-2014 | Written by Jonathan Smoke
The Commerce Department will report the first preliminary read on New Home Sales for March tomorrow. Economists are expecting an increase in March of just over 2 percent from the 440,000 annualized pace reported initially for February last month. We often poke fun at the monthly numbers, as the survey methodology behind the metrics often ends up with monthly changes that are not outside the survey confidence interval. So instead of waiting for the monthly press release, let me go out on a limb and report now that new home sales are indeed marching forward and should be looking more positive on both a month-over-month and year-over-year basis.
Metrostudy collects data on traffic and sales from builders around the country. The data aren’t as reliable as the full census we do in the field inspecting subdivisions lot by lot or by the lagging data on home closings, but in aggregate the traffic and sales metrics give us visibility into key leading trends.
The most reliable way to compare traffic and sales month to month and year over year is to look at the average traffic and average sales number per community as that helps to control for changes caused by more or fewer communities. Think of it as “same store sales.” So if the average traffic and sales numbers go up, builders are seeing better results across their communities.
We are seeing 2014 perform following a classic new home sales pattern. In such a pattern, sales should grow each month into the spring and summer and then decline in the second half of the year, reflecting the extreme seasonality of real estate and construction. I have been saying that each month this year is reflecting improving momentum, just as a classic seasonal pattern would predict. But when compared to last year, which looked more like the industry was shot out of a cannon in January, sales haven’t been as strong. The most negative bears said it was more than the weather. I say it was weather and a very abnormal start to last year.
It’s time for the bears to wake up and realize spring has spring because we hit a new milestone at the end of March even though the month was still harsh for winter weather. In looking at our weekly traffic numbers, the most significant story was seen in the final week of March. The last week of March recorded the best traffic and sales over at least the past four years for the same period. That was also the first week in 2014 that both the traffic and contract average surpassed the same data points in 2013.
Let me repeat that. The last week in the first quarter was the best week in four years—the comparison to last year is now positive.
Here are the key points from a monthly perspective to align with what the Commerce Department releases tomorrow. The traffic average for March was up 8 percent over last year and flat with February. Average contracts were up 16 percent over February, so the conversion rate is improving. Average contracts for the entire month were down 7 percent relative to last year, but as indicated above, on a weekly basis the last week in March was better than the last week in March last year.
Last year started with a bang, but had no momentum as we entered spring. Add in last year’s historically mild winter, the first quarter was simply hard to beat. Momentum now favors this year winning once we get past March.
Furthermore, the improvements are widespread. More than half of markets saw improvement in March over February and year over year in traffic. And 60 percent of markets saw sales improving in March over February.
Traffic is up substantially compared to last year in markets like Las Vegas, Washington, DC, and the Inland Empire. And traffic increased in March more than 50 percent over February in areas of Phoenix, Denver, and Chicago. Sales improved in March over February by more than 80 percent in areas of Chicago and Salt Lake City, while year over year sales are already 65 percent better or more in areas of Chicago, Maryland, Ventura, CA, and Chicago.
Are we expecting crazy increases? No. There is simply not enough finished or under construction inventory to enable more than 20 percent increases in sales over last year’s rates. But demand is solid as evidenced by traffic data and consumer survey data on plans to purchase in the year ahead. Meanwhile supplies are limited in both new construction and existing homes. If not in the month of March due to the fickle nature of the new home sales survey methodology, we should clearly see sales improving in April and as the year progresses on both a month over month and year over year basis.