New home sales adjusted for cancellations: Still signs that a slowdown may be on the way

– by a New Deal Democrat

A reporter asked me if new home sales might actually be on the decline due to the large increase in cancellation rates, as shown below (via Bill McBride):

That’s something I’ve known about as well commented a month ago in the context of housing that has been permitted but not commenced.

There are two points to answer.

The first is that this is not the first time new home sales have declined. There’s no reason to believe that there weren’t similar increases in cancellation rates in any of the other downturns caused by increases in mortgage rates, so the pattern in new home sales was likely similar in those downturns:

But let’s apply the data to current new home sales. Here’s the chart for the past two years that I reviewed last Friday:

Below, I show raw new home sales (year-over-year, in thousands) in the first column, followed by the cancellation rate for that month, and finally net sales after adjusting for cancellations:

April 619 8.0% 569

May 569 10.5% 509

June 571 15.2% 484

July 543 18.4% 443 (LOW)

August 566 18.3% 540

September 583 20.4% 468

Oct 632 25.6% 470

As stated above, the corrected bottom to date was in July. The ratio in October was in line with that of September and June.

Of course, the streak could certainly go lower in the coming months.

But as I’ve pointed out several times recently, now that the coming recession is almost certain, I’m starting to look for signs in the long leading indicators about how long this recession might be. And new home sales, for all their hype and heavy revisions, are a good place to start looking.

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