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New Homes "Sold" Is Not The Same As New Homes "Closed"

With tomorrow morning's New Home Sales report, markets will get a look at the number of newly-constructed homes sold in July. 

The figure is expected to be in the 825,000 range.  This is lower than June's 834,000 figure.

But -- as always -- there is more to the story.

When the Census Bureau reports on New Homes Sales, it only counts the number of new sales contracts written.  Specifically, New Home Sales doesn't measure what happens to contracts after they are signed. 

So, for each buyer that rescinds his contract or does not qualify for financing, the New Home Sales data is over-stated by 1.

A "new home sale" may cancel before closing for a multitude of reasons, including:

• Buyers can't sell their old homes and can't get financing
• Buyers are angry when developers reduce price on similar properties
• Mortgage products are no longer available for the buyer's borrowing profile

According to RealEstateJournal.com, cancellation rates were as high as 40% for big builders in November 2006.  We can only theorize that the number has since increased as home sales slow overall and the mortgage product menu shrinks.

In other words, tomorrow's New Homes Sales data is somewhat irrelevant to the overall U.S.  housing market.  It only measures contracts being written, not contracts being closed.

The Census Bureau even acknowledges this on their Web site.