by Calculated Risk on 4/23/2010 01:00:00 PM

First a comment on the seasonal adjustment ... on a Not Seasonally Adjusted (NSA) basis, the Census Bureau reported there were 38,000 new homes sold in March. That is up from 31,000 in March 2009.

Some (or all) of the increase was due to a one time event - the tax credit that expires in April. The Census Bureau doesn't know the number of homes sold due to the tax credit, so they report the Seasonally Adjusted Annual Rate (SAAR) assuming this is the underlying rate of sales. It isn't.

The April new home sales headline number will be distorted too, but the key is the actual underlying sales rate is much lower.

Note: remember the tax credit shows up in the new home sales numbers when the contract is signed (March and April), and in the existing home sales numbers when the transactions are closed (April through June).

The following graph shows existing home sales (left axis) and new home sales (right axis) through March.

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.

We are seeing another bump this year with the expiration of the extension of the tax credit.

The second graph shows the same information as a ratio - new home sales divided by existing home sales - through March 2010.

The ratio increased because the tax credit impacts new home sales first. I suspect this ratio will be at or near the all time low later this year.

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.