Census Bureau numbers out today state that new home sales rose 24% nationwide in June, although they state that the increase is from a downwardly-revised May number.  We already knew May was bad, but now the number has been revised to more accurately show just how bad.  The dramatic revision to the prior month’s number just reinforces how unreliable the government’s numbers are, and even in the new release they stated that sales rose 24%, plus or minus 15.3%, and they do not adjust for cancelled contracts.

Total demand is low, and the groups who *are* buying homes are segments that normally represent a small proportion of new home sales.  In the sunbelt, second-home buyers currently account for an abnormally large share of sales right now because they don’t have another house to sell.  Retirees also represent an abnormally large share because they have more equity than working families do.  This brings me to the point:  we are still missing the core market:  working families!   These folks are still staying away from the new home communities in droves because of the four Fs:  fear, financing, falling home prices, and finding a buyer for their other house!

Plus, for those who are ready and able, most are buying existing homes.  There is increased competition emerging from REO (bank-owned homes).  Listings are increasing, and many of those units listed are deeply discounted REO units.

My overall analysis is that there are pockets of strength, but there is still no ‘broad-based’ recovery in home sales.  We need to overcome the four Fs before the total aggregate level of new home sales gets back to a normal level.  Sales in the bubble markets had surged to the strongest levels since the downturn began, but now they are at the LOWEST levels since the downturn began.

The $8,000 tax credit was a failure, unfortunately.  It mostly only ‘pulled forward’ sales that were already going to occur.  The latest statistics show that sales per subdivision were dismal in May, and only slightly better in June and in the first half of July.  California extended their tax credit, but it will not help much.  The former fence-sitters already bought, and that has left behind a vacuum of demand.  Sales contracts per project were down again in June, and ALSO for the first two weeks of July versus year-ago, in Phoenix, Las Vegas, and San Diego.  Month over month, data show poor sales in June, with a little uptick in July in those markets.  In San Diego, June was even worse than MAY!

Our other data can shed additional light on the situation within the markets that we track.  One of the unique data items that we gather is a measure of new home demand (absorption).  In order to get an accurate count of the number of newly-constructed homes that have been absorbed (taken out of the vacant inventory), we have to drive in front of each house and look for signs of physical occupancy.   We are actually checking to see whether there are curtains or other window treatments, a welcome mat, any personal decorations or lawn art, hose connected to the hose bib, etc.  This gives us a very powerful measure of end-user demand.

What we have just found in conducting our 2nd quarter count of absorption is a wide variation of results:

There were large percentage gains in some of the California markets.

(all the percentage changes in this article are all 2Q vs. 1Q, unless stated otherwise)

• +34.5% in move-ins in Northern California
• +32.3% in San Diego
• +24.0% in Southern California
• Despite the gains in these markets, they all still remain below where they were a year ago.
• Central California was down 7.2%

• Raleigh-Durham’s absorption pace was up +37.8%!  (This off of a very weak 1st quarter; that market is up 10% versus the same quarter a year ago).
• Some of the largest decliners were Naples/Ft. Myers (down 22.0%), and Chicago (down 23.1%).
• Las Vegas absorptions rose a whopping 73.6%, largely because of the completion of the mammoth City Center project, which has just started to complete and close large numbers of units.

With regard to finished, vacant home inventory, the only major markets where we see an ‘equilibrium or better’ months-of-supply figure are Northern Virginia (D.C. area), San Antonio, Houston, and Baltimore.  They are all at 3.0 MOS or less.  The other major markets that we track all have a higher inventory level than 3.0 months, which indicates that builders have little pricing power.  (Builders are forced to keep prices discounted as long as the supply of built new homes is high relative to the absorption rate).

Two important notes:  1) the actual levels of new home inventories are now LOW in most markets, but the absorption rate is also low, which inflates the months-of-supply figure, 2) the finished, vacant inventories include homes owned by builders, banks, individuals, speculators, and Fannie/Freddie. The amount still held by builders is now generally quite low.

This has implications for the future path of new home PRICES.  My expectation is that new home prices will remain flat as a result of this high month-of-supply reading, with exceptions in certain “A” submarkets where demand is still fairly strong.

And, here are some of our new statistics on housing STARTS by market.

Our 100% counts of starts within subdivisions by market show that several national markets have had a surge in home production over the past few quarters.

The following are the percent change from 2Q09 – 2Q10.

South Florida +68.1%

Naples/Ft. Myers +83.7%

Las Vegas +65.1%

Denver +59.7%

In fact, the ONLY markets that we track that had declines in starts over that period were Chicago and Northern Calif.

This increase is consistent with my argument that builders have had to increase production just to meet the (still low) levels of demand that exist.  They can no longer meet demand out of their existing inventories.

All that said, I again stress that the increases going forward will be modest.  Some markets had large percentage increases, but the pace of starts is still at a deeply depressed level.