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What Percentage of The August Blowout New Home Sales Will Never Close?

New home sales reportedly surged 28 percent in August. A sizable percentage will not happen.
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New home sales data from commerce department, chart by Mish.

New home sales data from commerce department, chart by Mish.

On September 27, I reported New Home Sales Jump an Astonishing 28 Percent in August

My comment then was "I highly doubt this number will survive revisions."

One of my reasons was that new home sales are counted at contract signing whereas existing home sales are counted at closing. Cancellations have been huge.

Redfin Tweet Thread


Point number one is the key idea "As mortgage rates reach a new high since 2007, more homebuyers are delaying or canceling their buying plans altogether."

US Home-Sale Cancellations Soar in July as Buyers Pull Back

On August 16, Bloomberg reported US Home-Sale Cancellations Soar in July as Buyers Pull Back

Failed US home-purchase deals jumped in July as buyers continued to back away from the market amid rising mortgage rates.

Roughly 63,000 home-purchase agreements were canceled in July, equal to about 16% of properties that went into contract that month, according to an analysis by Redfin Corp. That was up from 15% of deals that fell apart in June. A year earlier, when the housing market was running hot, it was about 12.5%.

No Revisions, Just Bad Data

A check with the Census Department explains they are OK with bad data. Please consider this Census Department comment on Cancelled Contracts.

The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts.

The Survey of Construction (SOC) is the survey used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. 

Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice.

As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.

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In the short run the data is very flawed. 

In downturns sales are overestimated. In recoveries, sales are understated. 

Years later we have GDP revisions as a result.  Lovely. 

"No Recession" Idea Based On GDI Was Just Revised Out the Window

Speaking of revisions, the BEA made huge negative revisions to gross domestic income. 

Many people believed the US was not in recession because income numbers were not aligned with GDP.

Yesterday, I commented "No Recession" Idea Based On GDI Was Just Revised Out the Window.

Expect more revisions. And since we are headed into a slowdown, those revisions will tend to be very negative.

This post originated at MishTalk.Com

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