New home sales down 23.5%, prices 13% year ago

The Census Bureau reported that new homes sold at a 728,000 annual rate in October, down 23.5 percent from the year ago rate.

The October sales rate was up slightly from the revised September sales rate of 716,000, but sharply below the 770,000 rate previously reported. The August sales rate was also revised lower. The October sales rate is down 43.3 percent from 2005 levels. The decline has been especially sharp in the West, with the October sales rate down by 56.4 percent from 2005 levels.

The plunge in prices is at least as striking as the October fall in sales.

The median price reported for October is 8.6 percent lower than the September median and 13.0 percent below the year ago level. This is especially remarkable, since the collapse of the subprime segment of the housing market should skew the median price upward. (Subprime buyers are disproportionately at the low end of the market. If they can't buy homes, then the median home sold should be a more highly priced house.)

The inventory of unsold homes is reported as equal to 8.5 months of sales, which is down somewhat from the inventory to sales ratios reported for August and July.

However, it is important to remember that houses are reported as leaving the inventory once a contract is signed, even if it is subsequently canceled. While cancellation rates are typically low, in recent months major builders have reported cancellation rates in the neighborhood of 30 to 40 percent, primarily because buyers are having difficulty arranging financing.

Sales rates and inventory to sales ratios adjusted for cancellation rates of 10%, 20%, and 30%. This suggests that there is a much greater inventory of unsold homes and therefore more downward pressure on prices than the Census data imply.