New-Home Sales Surge

Nov. 29, 2005 — -- The Commerce Department's monthly look at sales of new homes is confounding economists. The report shows that new homes sold at a record annual pace of 1.424 million units during October -- a shocking 13 percent increase in a month where mortgage interest rates were relatively high compared to the last few years.

The increase is the biggest in more than 12 years and contradicts the best guess of most economists. The consensus estimate had sales falling to an annual pace of 1.2 million units.

The median price for a new home ticked up 1.6 percent to $231,200 during October.

What's happening here? I thought the housing market was slowing. By most indications it is. Today's report is counter to the conventional wisdom, (and all the other housing reports) but some are saying it makes sense -- it's a last spasm of expansion as anxious buyers jump to get in before mortgage rates go even higher.

Another factor that is likely helping buoy new-home sales is that large builders can offer incentives, such as favorable financing or price cuts, to lower their inventories. Some think that big firms like Lennar, KB Homes and other builders are worried about having too many unsold homes on their books, so they're making a big push at the end of the year to sell down inventory.

Overall, mortgage applications are falling, existing home sales are dropping and the overall supply of homes (both new and pre-owned) for sale is at a level not seen in several years. All these things point to a cooling in the housing market over time.

Most economists will tell you that one month does not make a trend. The next report due at the end of December should give a more complete outlook on whether there will be a new housing boom or a continued period of cooling.