New and Existing Home Sales: The Distressing Gap

Note: For graphs based on the new home sales report this morning, please see: New Home Sales Decrease in September

This is obvious but worth stating: new home sales are far more important for employment and the economy than existing home sales. When an existing home is sold, the housing stock doesn’t change, and the only direct contribution to the economy are the transaction costs. When a new home is sold, the housing stock of the nation increases, and there is a significant amount of spending on material and labor.

During the housing bust, new home sales fell much further than existing home sales (as a percent of sales). I’ve jokingly referred to the difference in percentage declines as the “Distressing” gap, because of all the distressed sales of existing homes.

More recently the gap has been supported by misdirected government policy.

Here is a graph of the “gap”:

Click on graph for larger image in new window.

This graph shows existing home sales (left axis) and new home sales (right axis) through September.

I believe this gap was initially caused by distressed sales, but more recently the gap has also been widened as a result of the first-time home buyer tax credit.

The second graph shows the same information, but as a ratio for existing home sales divided by new home sales.

The ratio is now at an all time record high.

Although distressed sales will stay elevated for some time, eventually I expect this ratio to decline back to the previous ratio.

The ratio could decline because of an increase in new home sales, or a decrease in existing home sales – I expect a combination of both.

Although I think we’ve seen the bottom for new home sales, I think we will see further declines in existing home sales as the impact of the home-buyer tax credit wanes, and as we see fewer distressed sales in low priced areas.