I’ve seen some commentary questioning when new home sales are going to turn northward and whether or not that’s key sign for the recovery. Yet, there is one thing we can say for nearly certain – New Home Sales aren’t going to hit records anytime soon.

How can we be so sure?

Because there aren’t any new homes to sell !!!

FRED Graph

What’s more with completions running just above sales, the number of new homes for sales is likely to decline in coming months. This in turn implies that new sales only have so far Northward to go.

FRED Graph

Now- to be completely honest- this isn’t technically speaking “true.” One can sell a new home that does not exist. The following is the lead photo on an actual for-sale listing here in Raleigh.

206 Drummond Drive, Raleigh, NC.

No artist rendering. No photo of the lot. Because their isn’t even a cleared lot. Here is the Google Streetview of 205 Drummond Drive. Its just trees.


However, the market for this stuff is fairly limited.

Most of the time developers at a minimum acquire property and begin to – you know – build houses before they can convince buyer to buy the properties.

This is part of why I think the popular interpretation of the housing overhang is misinterpreted.

The market for new houses more or less clears in the sense that the homes for-sale run at roughly the rate of homes being purchased.

However, what that implies is that changes in household formation will show up as a reduction in new home building – exactly what a competitive market should do. On the other hand slowdowns in household formation will result in an overhang of existing homes, as people move out – or are pushed out – of their existing home and into the arms of relatives.

So as always the key driver is household formation. As it picks up the overhand will fall and new home sales will pick up. But neither of the two are pushing on each other. They are both being pushed on by household formation.