New Home Sales Are Livelier Than They Seem

One aspect of the current housing recovery that has raised fears about its underlying strength is the disparity between the strong upswing in single-family housing starts and the modest pickup in new-home sales. At last count, the starts were up a healthy 38% above their recession trough last January. By contrast, sales of new homes in July were only 14% higher than their January low.

Economists at Fannie Mae, however, point out that most of this difference is a statistical artifact. They note that housing activity in the Midwest has been relatively strong this year and that about half of the homes built there are so-called owner- or contract-built houses constructed on owners' land-compared with about one-third for the rest of the nation. In government statistics, such contract-built homes are included in data on housing starts, but not in data on new-home sales.

The upshot is that the relative strength of the Midwest is tending to depress new-home sales data. Fannie Mae economists estimate that if the regional composition of housing activity hadn't changed this year, sales of new single-family homes in July would have been 20% higher than reported, or 37% above their low-almost exactly in line with the recovery in starts.