Why New Home Prices Must Fall Another 15% Before Sales Can Recover

(This post appeared at Financial Armageddon.)

Over the past 48 hours, the Census Bureau and the National Association of Realtors have announced new and existing home sales, respectively, for February. As expected (at Financial Armageddon, at least) neither set of data points offered any real encouragement for those who keep harping on about a recovery in the sector.

In fact, a comparison of annualized sales and median price trends for both data series reveals an interesting divergence — one that suggests new home prices will need to fall by 15 per cent from where they are now to entice buyers if the historical relationship between the two markets is anything to go by.

mikepanzer graph new homes gap
mikepanzer graph new homes gap

How did I arrive at this figure? I took the median differential (going back to 1999) between the monthly median prices for new and existing sales, or $23,000, and subtracted that from the latest reported differential, or $55,400. I divided the net result by February’s median price for a new single-family home, or $220,500, and got just under 15 per cent.

Of course, my approach might be way off base or overly simplistic, and I might not be taking proper account of structural differences between the two markets, including the possibility that the fallout from burgeoning foreclosures is having a more pronounced effect on the market for older, rather than newer homes.

Nonetheless, the fact that the new home construction industry remains fairly pessimistic about the outlook, as the National Association of Home Builder’s confirmed when it announced a worse-than-expected reading for its Market Index earlier this month, lends some weight to the notion that new homes have not yet reached price levels that many in the current pool of prospective buyers find appealing.

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