In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses new home sales.

• Continuing good news regarding the housing market as new home sales rose in 3.3 percent in April from the prior month and up 9.9 percent from one year ago.  The improvement is roughly in line with yesterday’s figure on existing homes.
• The latest median price of newly sold homes was $235,700, which is an increase of 4.9 percent from one year ago.  New homes nearly always sell at a higher price than existing homes.  But the gap has opened wider in recent years as many existing homes, particularly the foreclosed properties, were selling below the replacement cost.  That could also imply faster price recovery in the future for existing homes.
• 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.
• New home sales are likely to rise 25 percent this year and another 20 to 30 percent jump next year.  Inventory levels are very thin.  Housing starts suffered much more than the existing homes market and new home sales are now primed for a stronger recovery.  Unfortunately, the larger builders are likely beneficiaries at the expense of small builders because of very restrictive lending for construction loans to smaller-sized homebuilders, while the big builders can tap Wall Street funds.  Larger banks getting bigger and larger builders getting bigger at the expense of smaller players may be the unintended result of the Dodd-Frank bill.