The unexpected happened again. New-home sales fell to a seven-year low and February’s inventories of unsold houses at sitting at a 16-year high. Both were unexpected.

Sales of new homes unexpectedly dropped in February to the lowest level seen in nearly seven years, while inventories of unsold homes rose to a 16-year high, suggesting that the nation’s housing market was softening heading into the vital spring buying season.

Sales of newly constructed single-family houses unexpectedly slowed again in February, falling 3.9% to a seasonally adjusted annual rate of 848,000, the lowest level since June 2000, the Commerce Department reported Monday. Sales were down 18.3% compared with February 2006.

Economists surveyed by MarketWatch had been expecting an increase in February to about 1 million units.

I am wondering if bad news is ever expected. I am also wondering exactly what economists MarketWatch is surveying. Perhaps they need a new set of economists because this was simply not all that surprising.

Census Bureau Report

Those wanting to see the official data can find it in the Census Bureau report New Residential Sales For February 2007.

Sales of new one-family houses in February 2007 were at a seasonally adjusted annual rate of 848,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.9 percent below the revised January rate of 882,000 and is 18.3 percent below the February 2006 estimate of 1,038,000.

Home Sales Revisions

RodgerRafter on the Economic Rebalancing blog posted an interesting chart about the unexpected revisions.

The Housing Doom Blog had this graphic representation of the unexpected.

I am struggling to understand why month in and month out no one expects a decline in home sales to happen when I expect things to get much worse.

We are not even in a recession yet (or so is claimed) but inventories of unsold housing are at 16 years highs dating back to 1991. This is simple economics: To sell that inventory prices have to drop or demand has to pick up.

Understanding Demand – 3 Questions

  1. Who wants a house that does not have one?
  2. Who wants a house that can afford one?
  3. Who does not have a house and is willing to pay substantially more than rental prices for one?

Understanding Supply – 2 Questions

  1. How many have a house they can not afford?
  2. How many have a house they soon will not be able to afford?

Forget demographics, forget wants and desires, forget the fact that people have to live somewhere. Forget all of the nonsense from the NAR. Especially forget the NAR’s perpetual chant “There is no better time to buy than now“. According to the NAR there is never a better time to buy than now. Furthermore there will never ever be a better time to buy than now.

Two Key Facts

  1. Demand is weak and is going to get weaker.
  2. Supply is high and is going to get higher.

The following graphic thanks to JMF at Immobilienblasen.

Heading into a recession demand will weaken due to loss of jobs and rising subprime rates.

Supply is high but the bulk of ARMs resets has not occurred yet. Layoffs in the upcoming recession have not occurred yet. Substantial foreclosed properties are not even on the market yet.

So…. With demand getting weaker and supply getting higher exactly why was this report unexpected?

Mike Shedlock / Mish/