by Calculated Risk on 11/28/2012 11:49:00 AM

New home sales in October were below expectations at a 368 thousand seasonally adjusted annual rate (SAAR). And sales for September were revised down from 389 thousand SAAR to 369 thousand.

This has led to some worrying about the housing recovery, as an example from Reuters: New Home Sales Drop 0.3%, Cast Shadow on Recovery

The data leaves the pace of new home sales just below the pace reported in May, suggesting little upward momentum the market for new homes.

Yes, new home sales have been moving sideways for the last 6 months. However sales are still up significantly from 2011, and I expect sales to continue to increase over the next few years.

New home sales have averaged 361,000 on an annual rate basis through October. That means sales are on pace to increase 18% from last year. Most sectors would be pretty upbeat about an 18% increase in sales.

But even with the significant increase this year, 2012 will be the 3rd lowest year since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, but below the 375,000 sales in 2009.   I expect sales to double from here within the next several years as distressed sales continue to decline.

Click on graph for larger image.

I started posting this graph four years ago when the "distressing gap" first appeared.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to close - mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
• New Home Sales at 368,000 SAAR in October
• New Home Sales graphs