Understanding New Home Sales
New home sales are closely monitored by investors as they are considered a lagging indicator of demand in the real estate market and thus influence mortgage prices. They depend on factors such as household income, unemployment rates, and interest rates.
The U.S. Census Bureau publishes two types of measurements for new home sales: the seasonally adjusted number and the unadjusted number. The adjusted figure (which accounts for seasonal factors such as weather) is presented as an annual total, while the unadjusted figure is presented as a monthly total. These numbers are provided for different regions and for the country as a whole.
New home sales and other internal metrics, such as the absorption rate, are closely monitored by market participants as changes can be predictive of broader movements in the economy, such as the onset of a recession or the beginning of an economic recovery.
Data for new home sales measurements is collected through interviews with home builders and by studying data from the construction survey conducted by the U.S. Census Bureau. It uses data related to building permits issued for new construction projects. A new home is included in the measurement if a deposit was paid to purchase that home, or if a contract to purchase the home was signed in the year following its construction.
The seasonally adjusted figures aim to remove the impact of factors like seasonal weather or the general business cycle. The idea behind seasonal adjustments is to give market participants a clearer understanding of the underlying demand for new homes, independent of other factors affecting the economy. To help maintain data quality, continuous revisions are made and published as new data becomes available.
Due to the massive amount of transactions occurring across the entire economy, the U.S. Census Bureau relies on statistical techniques and sampling methodologies to estimate new home sales data from a small portion of the total transactions. As with any statistical method, these procedures result in a modest margin of error, which is included in the monthly reports.
Interpreting New Home Sales Data
Financial publications report on new home sales data and often provide interpretations of this data for readers who follow market news. For example, The Wall Street Journal reported in July 2019 that purchases of single-family homes increased by 7% compared to the previous month, a good sign after two months of declining sales.
When interpreting these results, the newspaper cited statements from experts attributing the positive results to increased demand for “starter homes” that are low-cost, which they attributed to lower unemployment rates, rising household income, and declining interest rates.
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U.S. Census Bureau. “New Residential Sales.” Accessed January 28, 2021.
U.S. Census Bureau. “Residential Sales: Frequently Asked Questions About News Releases.” Accessed January 28, 2021.
U.S. Census Bureau. “New Residential Sales: How the Data is Collected.” Accessed January 28, 2021.
The Wall Street Journal. “New Home Sales in the U.S. Rose in June.” Accessed January 28, 2021.
Source: https://www.investopedia.com/terms/n/newhomesales.asp
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