Lawler: Net Home Orders and Sales Cancellations of Large Publicly-Traded Home Builders

Note from Bill McBride: The data below via Tom Lawler illustrates the point I’ve made about the Census Bureau overstating sales when cancellation rates are rising. When looking at new home sales, we are interested in net sales, but the Census Bureau reports gross new sales. A simple equation would be:

Sales (net) = Sales (gross) – Cancellations + Sales of earlier cancellations.

In the long run, the cancellation terms balance out, and the Census Bureau numbers are what we want. In other words, Sales(net) = sales(gross). But in the short run, when cancellations increase, the Census Bureau overestimates net sales; and when cancellations decrease, the Census Bureau underestimates net sales.

Here is a discussion from the Census Bureau: How does the Census Bureau handle cancelled sales contracts?

Net Home Orders and Sales Cancellations

From housing economist Tom Lawler:

Below is a table of net home orders (gross orders less sales cancellations) of selected publicly-traded home builders for last quarter compared to the comparable quarter of 2021.  (Note:  sales cancellations from some builders are derived from reported cancellation rates, and may be off due to rounding).  Also shown are gross orders, as well as unadjusted new home sales reported by Census.

As the table shows, net orders of these builders last quarter were down 41.3% YOY, sales cancellations were up 58.7%, and gross orders were down 27.5%.   Census preliminary estimates of new home sales last quarter, in contrast, were down 19.3% YOY. 

Of course, the geographic footprint of these six builders does not match that of the country of a whole.  In addition, the second largest US home builder, Lennar Corporation, reported that net home orders in the quarter ended 11/30/2022 were down just 15.1% from the comparable quarter of 2021, partly reflecting the company’s early and aggressive actions to increase incentives and reduce prices. (KB Home, in contrast, reported a YOY decline in net orders for the quarter ended 11/30/2022 of 80.4%.

If one adds the Lennar and KB Home data to the data for the above six builders, one would get YOY declines in net orders of 36.9% and YOY declines in gross orders of 21.5%).

Nevertheless, it would appear as if the Census new home sales data, which treat sales cancellations differently from home builders, materially understate the YOY decline in net home orders “rightly defined” last quarter.