Small perk in home sales doesn't spell recovery just yet

New home sales have hit rock bottom — the lowest levels in decades — so it won't take much to improve from here. We are very optimistic that first-time buyers will reenter the market this year because:

• Affordability has improved tremendously, to the point that the monthly cost of homeownership is now less than renting in many areas.
• Tax credits that will expire are also available to these consumers.

Yet new home buyers are not going to return in droves as long as foreclosures abound and they are worried about their jobs. However, astute home builders who target their homes and marketing efforts effectively should see a pickup in sales.

As our column this month was going to press, U.S. Department of Commerce officials said new home sales rose 4.7 percent in February to a seasonally adjusted annual rate of 337,000 from a January figure of 322,000. The key to the headline was January: January sales were abysmal. The right way to look at sales is a rolling 12-month total, shown on this page. When the line starts to flatten, sales will have improved.

You'll know sales are improving when the line starts to flatten.

In our own research and discussions with builders, we are also hearing that sales are picking up in many markets. Each month, with Housing from the Frontline, John Burns Real Estate Consulting surveys thousands of public and private builders nationwide to gauge the conditions of every region by tying feedback to the metro.

In March, we heard from 216 public and private builder representatives at 146 individual companies about conditions in 80 metropolitan areas. For the third month in a row, builders' ratings of current sales improved and expectations rose. In fact, against our own survey's statistics, this represents the best market conditions since last September, before the demise of down-payment assistance. (See details below on how you can participate.)

While we know that the flicker of change will first manifest in the metros themselves, we caution people not to make too much of these shifting indicators. When you are starting from rock-bottom results (unanimity that sales are poor), even the smallest shift can seem like a rise.

Shades of Gray

In our research, we ask builders to rank their net sales per community as good, fair or poor. The NAHB/Wells Fargo HMI also polls builders on the same sentiment and casts their answer against that simple three-point rating.

If even a small number of builders shift to an incrementally better rating, it lifts the overall rating of current sales. From January to March, there was a big shift in the percentage of builders that moved away from the poor category and into the fair category.

By applying our rating against a 10-point scale, we are able to pick up more shades of gray. If even a small number of builders shift to an incrementally better rating, it lifts the overall rating of current sales. (In an attempt to provide full disclosure, we do not have the exact same respondents every month, so that is likely to cause a small level of variation.)

Here is a look at how net sales per community drops or rises within any month according to the builder's rating of current sales:

From January to March, there was a big shift in the percentage of builders that moved away from the poor category and into the fair category. January had 87 percent of builders rating sales poor and 12 percent fair. In January, 69.7 percent rated poor and 28 percent said fair. Throughout it all, the good category maintains its flat-line rating under 5 percent.

Monitor Your Market

*Peak activity since 1985. **Annual Mortgage Cost + 1/7th of the down payment divided by income. ***Proprietary affordablity scale with 0 meaning most affordable since 1983, 5 meaning median affordability, and 10 meaning least affordable time. Data on all markets available at www.realestateconsulting.com Sources: John Burns Real Estate Consulting, U.S. Bureau of Labor Statistics, U.S. Census Bureau through the month ending January 2009 (Employment data through December 2008.)

All builders know that the devil is in the details when it comes to data, and the headlines in the newspaper are no exception. Set up a market data tracking system to monitor when we are at bottom so you don't overreact to false news and you make the best decisions for your business.