by Calculated Risk on 6/23/2010 08:06:00 PM

This is something I've been tracking for years ... the first graph shows existing home sales (left axis) and new home sales (right axis) through May. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble, and the "distressing gap" (due partially to distressed sales).

Click on graph for larger image in new window.

Initially the 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 two spikes in existing home sales were due primarily to the first time homebuyer tax credit (the initial credit last year, followed by the extension to April 30th / close by June 30th). There were also two smaller bumps for new home sales related to the tax credit. Since new home sales are reported when contracts are signed, the 2nd spike for new home sales was in April and then sales collapsed in May.

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

The ratio decreased because the expiration of the tax credit impacts new home sales first. This is the all time low for the ratio (due to timing issues), and the ratio will increase somewhat as existing home sales collapse in July.

I expect that eventually this ratio will return to the historical range of new home sales being around 15% to 20% of existing home sales. However that will only happen after the huge overhang of existing inventory (especially distressed inventory) is significantly reduced.