by Calculated Risk on 3/26/2007 05:30:00 PM

Some people are wondering why existing home sales were up and new home sales were down. In the long run these two series correlate very well.

Click on graph for larger image.

This graph shows the annual new and existing home sales since 1969. Use the left scale for existing home sales and the right scale for new home sales. Clearly, using annual data, the two series move together.

Note: Rsquare is 0.87.

However there are some timing differences as to when the data is reported. From the Census Bureau:

New home sales and existing home sales are released each month at about the same time. Many comparisons are made between the two series, but before doing any comparisons, one must be aware of some definition differences that affect the timing of the statistics.

The Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction.

Existing home sales data are provided by the National Association of Realtors®. According to them, "the majority of transactions are reported when the sales contract is closed." Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.

Given the difference in definition, new home sales usually lead existing home sales regarding changes in the residential sales market by a month or two. For example, an existing home sale in January, was probably signed 30 to 45 days earlier which would have been in November or December. This is based on the usual time it takes to obtain and close a mortgage.

The shorter answer: new home sales have been crushed, existing home sales are about to be crushed.

For the general economy, new home sales are far more important, because of the related employment and spending on materials. However, for those directly impacted by existing home sales (real estate agents, appraisers, mortgage brokers, home inspectors, etc.), the coming slump in existing home sales will have a larger impact.