New-Home Sales Surged In October; Cooling Still Seen

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New-Home Sales Surged
In October; Cooling Still Seen

By Joi Preciphs and James R. Hagerty and Kemba Dunham
From The Wall Street Journal Online

New U.S. home sales in October soared to their fastest monthly pace in 12 years, evidence that while the housing market may be cooling in some sectors, overall it is still relatively healthy. Separately, November's consumer confidence and October's demand for manufactured goods surged -- all signs of stabilizing economic conditions for the remainder of 2005.

Sales of newly built homes rose sharply last month, the Commerce Department said, but many analysts questioned the report's reliability, saying they believe the housing market is on a cooling trend as mortgage rates rise and inventories of unsold homes grow. New single-family homes sold last month at a seasonally adjusted annual rate of 1.42 million, up 13% from the pace recorded in September, according to the department's latest estimate. The figure is 9% above the level posted for October 2004. Last month's surge is the largest since sales increased 16.4% in April 1993.

The new-home sales data came a day after the National Association of Realtors reported that sales of previously occupied homes fell 2.7% in October. The association's figures reflect home sales that were completed in the latest month; most of those sales are based on contracts signed a month or two earlier. By contrast, the data on new-home sales are more recent because they are based on initial sales agreements in the latest month, not completed transactions.

Builders appear to have maintained sales at a brisk level, partly by holding down prices. The median price of new homes in October was $231,300, up just 0.9% from a year earlier.

That's far below the recent trend for price increases. Over the past 24 months, prices for new homes on average have increased 9.7% from the year-earlier levels. Some builders also have been offering generous incentives that don't figure into the price, such as finished basements and golf-club memberships.

Daniel Oppenheim, an analyst at Banc of America Securities in New York, said the new data "appear to be an aberration." He said his firm's surveys of home builders show that demand generally has been cooling. Dave Seiders, chief economist at the National Association of Home Builders, termed the latest sales data "bizarre." He said his group's recent surveys indicate that sales generally have been slowing.

Even so, some analysts read the report as encouraging for the housing market. Though the data "can be extremely volatile" from month to month, said Michelle Girard, an analyst at RBS Greenwich Capital, "these numbers clearly indicate that housing demand remains robust. Some cooling seems likely going forward, but declarations of a collapse in the housing sector are premature."

Inventories of homes continue to build, something that eventually could weigh on prices. The department estimated that 501,000 homes were available for sale at the end of October, up 21% from a year earlier. Of those homes, about 20% hadn't yet been started, while 58% were under construction and 21% were completed.

Separately, new orders for durable goods rose a surprisingly strong 3.4% in October, following a revised 2% drop in September prompted by the aftereffects of the three Gulf Coast hurricanes and a strike at Boeing Co. that weakened aircraft and parts orders. Also, shipments of manufactured goods increased 1.4%.

"The manufacturing sector has held up quite well despite supply-chain disruptions," said Manufacturers Alliance/MAPI chief economist Daniel J. Meckstroth.

Mr. Meckstroth said a better reading is obtained from nondefense capital-goods orders, excluding aircraft, which fell 1.7% in September and rose 1.3% in October. Despite the data's volatility, he said it appears that production is "on an accelerating path in the fourth quarter" in the manufacturing sector.

"There's a pent-up demand for inventories because inventories have been driven to an extremely low level," he said. "The demand to build inventories accelerates industrial production."

Consumer confidence appears to be emerging from a worrisome phase with the report of a 13-point surge in the Conference Board's November consumer-confidence index. The New York-based research group's index rose to 98.9, up from 85.2 in October and 87.5 in September. The rise follows less encouraging numbers from the University of Michigan's November consumer-sentiment index last week.

Lynn Franco, the Conference Board's consumer-research director, said declining gas prices combined with an improved job outlook helped to boost consumer confidence.

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-- November 30, 2005