Home Prices Go Down, but New Home Sales Go Up

by Simon Lindsay on Foreclosures

Making heads or tails out of this housing market is a tricky proposition at times. Data comes in on a weekly basis, and each set of numbers brings with it oodles of questions, concerns, estimates, and assumptions that are processed to create some semblance of reason and reality for the real estate market.

Today is no exception.

According to data released by Standard & Poor’s Case-Shiller home price index, home prices fell 3.9% year-to-year for the third quarter. Of course, while that may be “bad”, it is an improvement from the second quarter’s decline of 5.8% year-to-year drop. So that is considered “good”…until you keep in mind that this overall trend still points toward falling home prices throughout the end of the year and quite possibly through the end of 2012.

Yet at the same time, with falling prices, another report comes in today about new home sales increasing. That’s right; according to the Commerce Department, new home sales grew by 1.3% from September to October and a blistering 9% from October 2010. Granted, only 307,000 homes will be sold at this annual rate – well below the one-million benchmark that experts say denotes a healthy housing market – but an increase of 9% is pretty remarkable, all things considered.

What’s the reason why so many people are starting to purchase new homes? One major reason has a lot to do with the other report discussed above – namely, lower home prices are starting to attract new buyers to a market that has been screaming for participation for the past few years. Another reason is because builders are offering pretty nice incentives to potential buyers, like no closing costs and free upgrades.

Naturally, these lower prices are due in a large way to the massive number of foreclosures on the market and waiting in the shadow inventory. Foreclosure listings continue to depress home values and make buying homes cheaper – even new homes, which are priced according to what is on the market in the local area.

There is another wrinkle to the story, though. A good percentage of these new home buyers are electing to purchase new homes instead of buying foreclosure properties because they want to upgrade from their existing homes. Normally, in a healthy economy, you want a large number of first-time homebuyers making the new home purchases. But, in this market, any new homes that are being built are (mostly) being built by people who have already been homeowners.

This leaves foreclosures as the best option, still, for virtually any homeowner or prospective homeowner who does not want to pay a premium to construct a home, yet no longer wants to rent. And as more buying opportunities pour into the market over the next year, that group will continue to grow.