The Corner

‘Unexpectedly’

It’s the word that’s been used so much by the press to greet dismal economic news that it’s become a punchline on par with terms such as “recovery summer” and “saved or created.” But in the case of today’s awful new home sales number, noted by Dan below, it really is warranted. New home sales are considered a leading indicator, because they are accounted for when the contract is signed. Existing home sales (the awful number we heard about yesterday) are a lagging indicator, because they are recorded when the sale is closed, which usually happens 30-60 days after the signing of the contract. Yesterday’s number was worse than expected, but at least most forecasters expected it to be bad based on last month’s new home sales numbers. But this month’s new home sales numbers were supposed to be better than last month’s, which were supposed to be aberrational due to the expiration of the Home Buyers Tax Credit in April.

The point is that, in these atrocious housing numbers, we are seeing something more than just the absence of the demand that the tax credit pulled forward last spring (though we are seeing that).  We are seeing the resumption of housing prices toward a trend line that has not yet been reached. As a result, we are likely to hear calls for more government intervention to reverse this correction, but that would be extremely unwise. At least last year policymakers had the excuse that the nation’s financial infrastructure was too fragile to withstand a total housing correction. But the panic has passed. It’s time to let housing find its market-clearing price.

Update: Calculated Risk has a chart with some perspective on the other big difference between new and existing home sales:

Note that what appears to be a narrowing of the gap is really an illusion due to the leading/lagging nature of the two variables. There is still a big overhang of distressed properties that need selling before the gap starts to close for real.

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