Housing Market Update: Home Builders Show Optimism

New-Home Sales Fall in 2011 -- Existing Home Sales Show Improvement

Last Thursday, the US Commerce Department reported that 2011 was the worst year for new-home sales since 1963. It attributed the decline to competition from resale homes, which are much cheaper, primarily because of foreclosures and short sales. (Short sales are when lenders accept less for a house than what is owed on the mortgage.)

Although new-home sales represent less than 10 percent of the housing market, they have a powerful multiplier effect and are usually a good indicator of economic momentum. For example, the National Association of Home Builders says that each new home built creates an average of three jobs for a year and generates nearly $90,000 in tax revenue.

With 30-year mortgage rates hitting a record low of 3.88% last week, and employment showing signs of improvement, homebuilders and economists believe that 2011 may have been the bottom for new-home sales and that there may be a rise in sales in 2012.  However, that rise must be substantial in order to bode well for the economy. Economists suggest that at least 700,000 new homes must be sold annually to indicate a healthy economy, but only 302,000 new homes were sold in 2011, compared to 323,000 sold in 2010.

While new-home sales have come out with disappointing reports recently, existing home sales have had a positive trend over the past few months, excluding December. The Pending Home Sales Index, a leading indicator that gauges the demand for resale housing, showed a 7.3% gain in November and 10.4% increase in October. Still, existing home sales fell -3.5% in December, missing the -1.0% consensus. However, existing home sales in December 2011 were above sales of December 2010, indicating a slight improvement, and existing home sales rose 1.7% in 2011 to 4.26 million from 4.19 million in 2010.

Home Prices Drop Even Further

Many Americans have been putting off buying homes at all, in part to see how low those prices --including prices for new homes—will go. In fact, new home prices have decreased as home builders have slashed their prices to stay competitive, adding to the supply of relatively cheaper homes.

The median sales price for new homes dropped last month to $210,300, a significant year-on-year decline of -12.8%. 

Despite dropping prices and low sales, economists and home builders remain optimistic. They believe that record low interest rates, job growth and bargain home prices will give consumers the confidence to enter the housing market.