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New home sales & co: what it is
By Gabriele Brambilla
Get to know all the key housing market indicators in a few minutes: New Home Sales, Housing Starts, Existing Home Sales and Pending Home Sales
Introduction
Let’s enter the world of the housing market by talking about the main indicators around, especially as far as the United States is concerned: New Home Sales, Housing Starts, Existing Home Sales and Pending Home Sales.
Brick is one of the pillar sectors of the economy. Home buying and selling (and construction) moves huge sums that impact a country’s GDP in no small measure. In addition, more generally, market trends are constantly monitored to assess the direction of the economy as a whole.
We have seen (and still see) how brick can weigh on the economy and finance. The Subprime Mortgage Crisis is certainly the most significant recent example, but there would be others as well. Consider, for example, the current state of California, where the housing market has a huge imbalance between supply and demand (the former far exceeds the latter), prices have taken off, and a severe crisis has pervaded the country. A very simplistic description of a far more complex set of issues, but nonetheless useful to give an idea of the magnitude of this industry.
Realizing the importance of the industry, we need only get to know the three indicators featured in this in-depth study. We will start with New Home Sales, which is the figure most closely monitored by industry insiders.
New Home Sales
New Home Sales is an economic indicator, published monthly by the U.S. Census Bureau, that measures new home sales. It is also known as New Residential Sales.
The indicator is the most widely followed by investors and industry insiders. The reason? It is a lagging indicator of demand, with significant impact on mortgage interest rates. Everything is connected: new home sales are affected by other factors such as unemployment, interest rates, income and so on.
The value of New Home Sales does not just boil down to a number, but we need to look at what the data wants to tell. Indeed, trends in the housing market can reveal what turn the economy more generally is taking. Of course, based on other factors we should already have an idea of what the future holds; however, New Home Sales helps us understand whether we are actually going in one direction or the other.
How is the indicator created? It combines questionnaires submitted to home builders with Census Bureau data on the construction industry, specifically by looking at building permits issued for new housing projects. A home is included in the calculation only if the initial deposit has been paid, or if the purchase contract has been signed within the year of its construction.
We have available two New Home Sales:
- One adjusted by season (weather) and/or industry cycle. This eliminates other factors that could dirty the data;
- The other, unadjusted.
Housing Starts
Let us briefly discuss an indicator that does not capture any buying and selling, but only the start of new construction or residential units: the Housing Starts.
As we can imagine, the figure offers practical insight into the housing industry and the direction it is heading. It is published monthly on the 12th business day, taking questionnaires submitted to builders as sources.
Housing Starts gives us insight into how much willingness there is to spend resources on new projects, which are generally motivated by estimates of housing demand. Thus, indirectly, the indicator can give us a better understanding of what consumer sentiment is and how much they are willing to spend at any given time.
Again, we find a figure that is subject to adjustments motivated by seasonality; in addition, there is a geographical division into four areas, which we will also encounter in other indicators.
Existing Home Sales
The name suggests the nature of this indicator: the Existing Home Sales measures the sale of existing homessuch as single homes, condominiums and co-ops (housing cooperatives) in the United States.
Existing Home Sales is divided into four areas (West, South, Northeast and Midwest) and also captures prices, not just quantity.
By comparing it with New Home Sales and Housing Starts, it is possible to understand the balance of power in the housing market between new and existing homes.
The figure comes out monthly through the work of NAR ( National Association of Realtors). According to just what the association specifies, transactions are counted after closing and those still pending are not taken into account. It generally takes 1/2 months to finalize the deal, since in most cases the buyer has to apply for a mortgage. Thus, the figure we display today is largely composed of transactions that occurred last month, if not the month before.
Pending Home Sales
We conclude this brief “journey” into the real estate world with Pending Home Sales, created in the United States by NAR.
This indicator figure tracks real estate sales where the documents and contract are already signed, but the actual transaction has not yet completed. Consequently, these transactions could not fall under New Home Sales or Existing Home Sales (they are not finalized), but they find a specific indicator to represent them.
It is considered one of the leading indicators to illustrate home sales because it is based on a large sample of contracts from all U.S. states.
Given its nature, Pending Home Sales helps us to predict future results especially of Existing Home Sales. Let’s keep in mind that in the States it takes one to two months after the contract is signed to conclude the negotiation. So when shown by Pending Home Sales it may translate on the other indicators within 4 to 8 weeks.
With that we have finished (for now!). Thank you for reading us!
