by Calculated Risk on 3/24/2010 12:38:00 PM

The following graph shows existing home sales (left axis) and new home sales (right axis) through February. I jokingly refer to this as the "distressing gap".

Click on graph for larger image in new window.

The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The spike in existing home sales last year was due primarily to the first time homebuyer tax credit.

Notice that there was also a bump last year in new home sales from the tax credit.

NOTE: New home sales and existing home sales are reported at different times: new home sales are reported when the contract is signed, and existing home sales are reported when the deal closes. So the bump in new home sales last year happened earlier than the spike in existing home sales.

The same thing will happen over the next few months. Any bump in new home sales from the tax credit will happen in March and April - when the contract is signed. Any bump in existing home sales will probably happen in May and June when escrow closes.

The second graph shows the same information as a ratio - new home sales divided by existing home sales - through February 2010. (In previous posts about this ratio, I graphed existing home sales divided by new home sales - this is the same ratio inverted).

This ratio is near the all time low set last November. In November existing home sales were artificially boosted by the first time home buyer tax credit - but as mentioned above - the bump in new home sales had happened earlier.

Eventually this ratio will return to the historical range of new home sales being around 15% to 20% of existing home sales. However it will probably take a number of years to return to a more normal market.