New & Existing Home Sales Methodology

Following my comments Friday on New & Existing Home Sales reports for April, here’s an word from the National Association of Realtors (NAR) on New Home Sales methodology. To be clear, the NAR tracks Existing Home Sales and the Census Bureau tracks New Home Sales, but I’m highlighting NAR’s comment on New Home Sales because it’s in plain English:

There are two key differences between new and existing home sales. First, new home sales are not closings but are new contract signings. There is no official figure on closed sales of new homes, but one would expect that all the newly built ones will eventually sell at some point despite short-term contract fallouts. Second, new homes comprise a very small market share. Normally, new homes would make up about 15 percent of total home sales. In recent years, new homes have made up only 5 to 8 percent of all home sales.

And rooting out the clearest language from the source, here’s the Census Bureau on methodology for their monthly New Home Sales report:

The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. An estimate of these prior sales is included in the sales figure. On average, the preliminary seasonally adjusted estimate of total sales is revised about 4 percent. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics.
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The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts.

The Survey of Construction (SOC) is the survey used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the “for sale” inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey.

Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice.

As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.

As for the NAR and their monthly Existing Home Sales report, that reports on closed sales. They also have a separate Pending Home Sales report that covers existing homes that have entered into contract. Above, the NAR says New Home Sales have only been 5-8% of all home sales versus a historical norm closer to 15%. Right now it’s 7%.

Below is the NAR’s full post on New Home Sales. They take some deserved punches for being a propaganda machine, but actually their blog has some good data pieces.

NAR on New Home Sales (a report they don’t produce)

New Home Sales Methodology: Census Bureau

Existing Home Sales Methodology: NAR

Current data/trends on: existing sales | pending sales | new sales | home prices

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