Katie Cannon  /  MSNBC.com
“Unbelievable — it's hard to sort out,” said David Seiders, chief economist for the National Association of Home Builders, describing the red-hot pace of new-home sales. “The first quarter is so easily a record it's not even funny.”
By Martin Wolk Executive business editor
updated 4/26/2005 6:15:14 PM ET 2005-04-26T22:15:14

Sales of new homes unexpectedly surged 12 percent in March to a new record, defying predictions of economists who long have expected the red-hot market to show signs of cooling.

"This housing market is so hot that hot is not a correct term for it," said Joel Naroff of Naroff Economic Advisers.

"We are talking about levels that simply are unimaginable," he said in a note. "How many first, second, third and fourth homes can people afford?"

Even David Seiders, chief economist for the National Association of Home Builders, said he was at a loss to explain the sales surge, which came on top of upwardly revised figures for January and February. He and other analysts had expected sales to decline in March.

He said the trade group's surveys of builders had failed to pick up any signs of a surge in demand.

"Unbelievable — it's hard to sort out," Seiders said in an interview. "The first quarter is so easily a record it's not even funny."

Although many analysts expect sales to slow in the second half of the year, assuming that long-term interest rates rise from still-low levels, new and existing home sales combined are on a pace to top 8 million units this year, which would be a fifth straight record year.

Last month sales of new, single-family homes rose to a seasonally adjusted annual rate of 1.43 million units, up 12.2 percent from 1.275 million in February. It was the biggest one-month jump since September 1993.

The news came on top of Monday's report from the National Association of Realtors that sales of existing homes rose a surprising 1 percent last month to the third-highest pace on record. The median price for existing homes jumped 11 percent from year-earlier levels to $195,000 — the biggest jump in 25 years.

By contrast the median price for new homes, $212,300, was up only 1.3 percent from year-ago levels and down 6 percent from February.

The monthly drop in price could be partly explained by weather-related seasonal patterns that saw sales surge in the lower-priced states of the South and Midwest but decline in the Northeast.

Wachovia Securities economist Jason Schenker speculated that some home builders might have lowered prices, perhaps because of nervousness over a housing bubble. If they intended to drive up sales, it appears they succeeded.

Analysts offer a number of theories for why the housing market, which boomed all through the recession of 2001 and the jobless recovery that followed, has continued to expand:

  • Immigration and job growth are driving rising demand for homes.
  • Buyers are scrambling to get into the market before long-term mortgage rates rise.
  • The vast baby-boom generation is snapping up second homes for retirement or investment purposes.
  • The weak dollar has driven a wave of buying interest among Europeans and Asians.
  • Small and large investors, disillusioned by the stock market, have turned to real estate in an effort to make a quick killing.

The last possibility worries some large builders, who have begun to move aggressively to prevent speculation on new homes. Some builders, for example, have contracts that charge a $50,000 penalty for buyers who "flip" within a year.

"We don't sell to flippers," said Kelly Masuda, senior vice president and treasurer of KB Home, one of the nation's largest home builders. "We are trying to build a community, and if you are trying to build a community you don’t want your neighborhood littered with for-sale or for-rent signs."

The real danger to builders, said Seiders, is that speculators will artificially drive up demand and then withhold supply from the market, leading to the possibility that a large number of homes will suddenly be "dumped" onto the market when economic conditions change.

For now, there appears to be little danger of oversupply.

At this pace, it would take only 3.6 months to go through the available supply of new homes, the lowest level in a year and near historically low levels. Inventory of existing homes is similarly tight at four months' worth of supply, down from 4.4 a year ago.

"I think the new-home sales coupled with the low inventory levels shows that demand remains strong," said Masuda. "One month is never a trend but housing has continued to remain strong."

He credited favorable demographics -- including immigration to the Sun Belt states in the South and West where the company is focused.

And long-term mortgage rates, after a brief bump-up in February, have headed back down and remain well below 6 percent for the typical 30-year, fixed-rate mortgages.

Short-term rates, of course, have risen sharply and are expected to rise further next Tuesday when Federal Reserve policy-makers meet. That drives up the costs of many adjustable-rate mortgages, but so far that seems to be having little impact.

Major Market Indices

"There are an awful lot of highly creative mortgage instruments out there being heavily used, especially in the hot markets," Seiders said.

There certainly are still some economists worried about a brewing housing bubble that could collapse, especially in superheated markets on both coasts.

Yale economist Robert Shiller, who gained fame by correctly predicting the collapse of the tech-stock bubble, said housing prices are being driven largely by psychology, much like a bull market for stocks.

"I think home prices are not fundamentally different than the stock market," he said on CNBC Monday. But even so he declined to predict when housing prices might peak. "I don’t know that it's imminent."

The home-sales figures appeared to put to rest concerns of a slowdown raised last week by a report that housing starts plunged 18 percent last month. Permits issued for future construction fell to their lowest level in six months.

Tuesday's sales report was particularly encouraging because new-home sales are generally a leading indicator for the housing market. New-home sales are reported when contracts are signed, while existing-home sales generally lag by one or two months because they are not reported until deals close.

Schenker said the home sales news also was encouraging after a spate of unfavorable economic news that roiled the stock market earlier this month, including sluggish retail sales and a sharp jump in wholesale and retail prices.

Consumer confidence fell in April for a third straight month, according to The Conference Board, a New York-based research group. But other, more forward-looking figures have shown signs of renewed strength, including a decline in new claims for unemployment and a surge in manufacturing sentiment in mid-Atlantic states.

If you would retake the consumer confidence survey today it probably would be a lot higher," said Schenker of Wachovia Securities. "I don't think on the whole there is a lot to worry about."

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