Head Fake

The Commerce Department released new home sales for the month of October and the results were a lot better than what housing bears and many economists were looking for.

There seem to be lots of opinions as to why results were so strong, especially after the weakness in existing home sales yesterday. My own theory is that home builders offered major upgrades, rebates and incentives in the period to move their inventory. Moreover, I think the incentives would not show up in the sales price that is reported but will eventually show up in fourth quarter earnings as a reduction in the builder’s gross margin.

For example, I would guess that a home builder will list to sell a $350,000 house and offer an upgraded kitchen with a value of $15,000 instead of just reducing the sales price to $335,000. By doing this, the comparables still look strong.

“The Commerce Department reported that new home sales rose by 13 percent in October to a record 1.424 million annual rate, apparently contradicting other signs that the U.S. housing market may be coming off the boil.
Wall Street economists had expected to see sales slow to a 1.20 million pace from the 1.22 million rate in September.

But the report also showed that home prices were not rising at quite the same pace -- up 1.6 percent -- and the number of homes still on the market reached a record 496,000.

"The demand for new housing surged, likely because rising mortgage rates motivated some potential homebuyers to accelerate their buying decisions," said Steven Wood, economist at Insight Economics in Danville, California.

However, Wood noted that inventories of unsold new homes were also climbing.
"Moreover, despite the huge increase in sales, home price momentum has slowed as home builders are beginning to use discounts to motivate buyers," he said.”

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