1. New Home Sales as a Measure of Economic Well Being Rabin Saidian Patricia Trujillo Market Indicators Spring 2007

2. “It is the policy of the United States to encourage, support, and promote the private ownership of property and to ensure that the constitutional and other legal rights of private property owners are protected by the Federal Government.” “It is the policy of the United States to encourage, support, and promote the private ownership of property and to ensure that the constitutional and other legal rights of private property owners are protected by the Federal Government.” - H.R. 4128, §10 - H.R. 4128, §10 The emphasis of American culture on property ownership tells us that we can examine the real estate market and have some idea about the state of the economy.

3. New Home Sales New Home Sales Published by: Bureau of the Census Published by: Bureau of the Census Frequency: monthly Frequency: monthly Period Covered: prior month Period Covered: prior month Volatility: high Volatility: high Market significance: moderate Market significance: moderate Web site: www.census.gov Web site: www.census.gov

4. What is it? Tracks how many new single-family houses were sold throughout the United States during the previous month, a house being considered “sold” when the contract has been signed or a deposit has been accepted. Tracks how many new single-family houses were sold throughout the United States during the previous month, a house being considered “sold” when the contract has been signed or a deposit has been accepted. Data is collected through the Survey of Construction, which surveys all the purchases of houses requiring a building permit plus those not requiring one. Data is collected through the Survey of Construction, which surveys all the purchases of houses requiring a building permit plus those not requiring one.

5. What is in the Report? Information about: Information about: –Number of houses sold for each region (South, West, North-east, Mid-west), in thousands. –Month supply (i.e. how many months would the inventory last at the going rate if no new houses are built) –Median Sales Price –Average Sales Price –Number of houses sold by type of financing –Number of houses sold by sales price

6. Why is it important? Highly volatile, leading indicator of economic activity Highly volatile, leading indicator of economic activity Houses are investment tools in addition to commodities (due to the appreciation of land) Houses are investment tools in addition to commodities (due to the appreciation of land) Consider that Y = C + G + I + NX; since houses are generally very expensive and call for extensive financing plans…. Consider that Y = C + G + I + NX; since houses are generally very expensive and call for extensive financing plans….

7. Why is it Important? … the purchase of a new home increases C significantly, causing an increase in Aggregate Demand, ceteris paribus. … the purchase of a new home increases C significantly, causing an increase in Aggregate Demand, ceteris paribus. Increased housing purchases are indicative of increased consumer optimism about the future, and vice versa. Increased housing purchases are indicative of increased consumer optimism about the future, and vice versa. In addition, because of the role of banks and lending institutions, purchases of new homes figure greatly into the market for loanable funds. In addition, because of the role of banks and lending institutions, purchases of new homes figure greatly into the market for loanable funds. Directly related to federal funds rate Directly related to federal funds rate (i.e. increasing the rate decreases liquidity, making it more difficult to obtain loans and purchase new homes). (i.e. increasing the rate decreases liquidity, making it more difficult to obtain loans and purchase new homes).

8. Keys to Interpreting the Data Be aware of seasonal fluctuations: housing sales increase during spring and summer, decreasing during fall and winter. Be aware of seasonal fluctuations: housing sales increase during spring and summer, decreasing during fall and winter. The “annually adjusted rate” takes care of these fluctuations, giving us a clearer depiction. The “annually adjusted rate” takes care of these fluctuations, giving us a clearer depiction. This data focuses only on single-family, residential units; commercial properties are not included. This data focuses only on single-family, residential units; commercial properties are not included.

9. Latest Release An annually adjusted rate of 858,000 new homes were sold in March 2007. This is 2.6% higher than the revised February 2007 figure of 836,000, but 23.5% below the estimated 1,121,000 homes sold in during March 2006. The first estimate (2.6%) includes 0 in its confidence interval, signifying that this figure is not statistically significant; the 23.5% decrease, however, was statistically significant.

10. Additional Information about March 2007 Median Sales Price = $254,000 Median Sales Price = $254,000 Average Sales Price = $330,900. Average Sales Price = $330,900. The current sales rate represents a supply of 7.8 months. That is, if no new houses are built, the “for sale” inventory would last 7.8 months. The current sales rate represents a supply of 7.8 months. That is, if no new houses are built, the “for sale” inventory would last 7.8 months.

11. Historical Data

14. Data Analysis Recent data indicate that the market for new houses has been declining, which is symptomatic of a weakened economy. Recent data indicate that the market for new houses has been declining, which is symptomatic of a weakened economy. Also, we note that the increase from last month was not statistically significant, while the decrease from last year was: this means that if we adjust for seasonal fluctuations, the market has declined. Also, we note that the increase from last month was not statistically significant, while the decrease from last year was: this means that if we adjust for seasonal fluctuations, the market has declined.

15. Data Analysis On the other hand, the figures may have improved since last month, and the last chart we looked at seems to have an upward-pointing “tip.” Also, a sudden decrease in the federal funds rate would certainly cause inflation. On the other hand, the figures may have improved since last month, and the last chart we looked at seems to have an upward-pointing “tip.” Also, a sudden decrease in the federal funds rate would certainly cause inflation. Therefore, on the basis of this indicator alone, it would seem that the Fed should wait a month or so, and if things get worse, it should gradually decrease the federal funds rate. Therefore, on the basis of this indicator alone, it would seem that the Fed should wait a month or so, and if things get worse, it should gradually decrease the federal funds rate. In fact, according to a recent Federal Reserve Press Release (May 9, 2007), the Fed did decide to keep the rate steady at 5.25% until the economy sends more signals about its well being. In fact, according to a recent Federal Reserve Press Release (May 9, 2007), the Fed did decide to keep the rate steady at 5.25% until the economy sends more signals about its well being. (Standing Ovation) (Standing Ovation)