New-Home Sales Fell in October, but the Housing Market’s Trajectory Remains Positive

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The numbers: Sales of newly-constructed homes in the U.S. decreased 0.7% on a monthly basis in October to a seasonally-adjusted annual rate of 733,000, the government reported Tuesday.

However, the figure for September was revised up to 738,000 from 701,000. As a result, September’s new-home sales surpassed June’s figure, which had broken a 12-year record at the time.

The MarketWatch consensus estimate for October was 705,000. This was the first time since 2007 that the annual pace of single-family home sales remained above 700,000 for three consecutive months. New-home sales were nearly 32% higher on an annual basis in October.

What happened: The median sales price for new homes was $316,700 in October. The government estimated there was a 5.3-month supply of new homes available for sale, down from September’s 5.5-month supply. The supply of homes peaked around seven months back in December 2018.

Regionally, home sales increased in the West and Midwest, but fell in the Northeast and South.

Big picture: The small sample size of the new-home sales report from the Census Bureau lends itself to wide swings and significant revisions, as were seen in the October release.

“The new home sales numbers are among the least reliable of all the regular closely-watched economic reports, with a margin of error typically in excess of +/-15% per month,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in a research note ahead of the report’s release. “These numbers often are revised substantially, so the best approach to each new report is to treat it largely as the announcement of a random number, and to look instead at the underlying trends.”

As with other indicators of the U.S. housing market, new-home sales have improved as mortgage rates decreased toward the end of summer and then remained at those low levels. New-home sales were also hampered at the beginning of the year by changes to the U.S. tax code that capped the federal tax deductions for state and local taxes.

Home-building activity has continued to improve, a sign that new-home sales should remain strong in the months ahead. However, weather will become a factor as winter approaches.

“New sales are captured when contracts are signed, which often takes place at new home development sites,” Shepherdson wrote. “Traffic at developments always falls during the winter, but very bad weather can overwhelm the seasonal adjustments.”

Market reaction: The Dow Jones Industrial Average and S&P 500  increased slightly in Tuesday trades, and the 10-year Treasury note’s yield was down.

Shares of home-building firms, including PulteGroup, D.R. Horton,  and Lennar Corp. all rose in morning trading following the new home sales report’s release.

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