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The inventory of unoccupied new homes in the U.S. is self-correcting

06/23/2011 by Alex Carrick, RCD Canadian Chief Economist

The number-of-months inventory of new homes for sale in the U.S. has again fallen to the lowest level since the mid-way point of 2006. As of May 2011, it was 6.2. The word “again” has been used because it was also that low in April 2010. At that time, there was a special reason. A substantial first-time homebuyer tax credit was set to expire.

Immediately afterwards, the number-of-months inventory shot up to 9.2 months. It has been struggling to recover closer to “normal” ever since.

The norm for the unsold inventory of new homes is 4.5 months or slightly less. The current figure (6.2) is so high only because the sales rate is so low. The denominator in the ratio calculation – unsold homes divided by the current monthly sales rate – is exceptionally low.

How low is the number of unsold new homes? In 2005, before the collapse of the housing market, more than 100,000 new homes were being sold each month. In other words, the current stock of unoccupied new homes would have been exhausted in only a month and a half.

Contrast the shortage of unoccupied new homes with the huge surplus inventory in the existing homes market. The latter is due to the surfeit of mortgage foreclosures. Nevertheless, this is bound to introduce some distortions into the overall residential real estate market.

Similar to shopping for a new versus used (i.e., “pre-owned” in the modern vernacular) car, there are going to be some homebuyers whose preference will only be for a newly-built home.

As for the existing homes market, the National Association of Realtors (NAR) reported that May sales dropped 3.8% from April, to 4.81 million units seasonally adjusted and annualized. That left them 15.3% below May 2010. Spiking gasoline prices and severe weather in parts of the U.S. were two factors that dampened shopping activity this latest spring.

Another factor limiting sales has been restrictive lending practices, according to the NAR. There was too-easy access to money before the sub-prime mortgage mess, but now the pendulum has swung too far in the opposite direction. Lending institutions, once bitten, have become afraid to make credit available to potential borrowers who meet but may not exceed all reasonable qualifications.

Nearly one-third of resales in May were distressed homes. Such properties typically sell for a discount of about 20%. The drop in prices is combining with record low interest rates to yield the best affordability conditions in 40 years.

The unoccupied inventory of existing homes in the U.S. stood at 9.3 months in May (i.e., stock divided by latest monthly sales rate).  

The NAR does expect sales activity to be stronger in the second half of this year than in the first half and much stronger than in the second half of last year. Nevertheless, the overall state of the U.S. economy is a cause for concern. Some of the worry relates to what is happening elsewhere.

The sovereign debt crisis in Europe has come to a boil again. Greece is on the brink of default.  Ben Bernanke, Chairman of the Fed, has directly confronted the issue. In a press conference following the latest meeting of the rate-setting Open Market Committee, he said U.S. banks have been stress tested to determine their exposure to Greek debt. Their potential losses have been judged minimal.

President Obama has used domestic economic concerns as one reason for reducing America’s military presence in Afghanistan.

The President has committed to bringing 10,000 American troops home this year and 30,000 by the summer of next year. This will still leave 100,000 U.S. and foreign troops in that country. But it will reduce the U.S. position to its pre-surge level and it will begin to make a dent in the $100 billion dollars-plus per year that are being spent. That’s money that can be used at home.  

In essence, re-building Afghanistan has been set aside in favor of re-building the U.S. Mr. Obama is leaping in front of the political debate by addressing an issue that has crossed political boundaries. There are supporters of a quicker exit strategy among members on both sides of the House. The weight of public opinion has shifted in that direction, since the death of Osama Bin Laden and upon hearing some unfortunate comments from Afghanistan’s leader, Hamid Karzai.  

The U.S. unemployment rate is stubbornly locked above 9.0%. The latest initial jobless claims figure, for the week ending June 18, was higher than expected. At 429,000, it indicated new jobs are being created but at a very slow pace. And they are only barely keeping ahead of new layoffs.

New jobs are thought to closely match new layoffs when initial jobless claims rise to half a million. While the figure has been below that level since the start of last year, it hasn’t fallen far enough with any consistency. Earlier this year, it did drop below 400,000, but then rose again.

It needs to drop below 400,000 and stay there on a regular weekly basis to cause the kinds of month-to-month gains in employment (+100,000 per month and more) that will lift incomes and restore confidence that the business sector is finally turning things around.

U.S. new home inventory - May 2011
U.S. new home inventory - May 2011
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau (Department of Commerce) and Canada Mortgage and Housing Corp. (CMHC).
Chart: Reed Construction Data - CanaData.
U.S. new homes sold - May 2011
U.S. new homes sold - May 2011
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau (Department of Commerce) and Canada Mortgage and Housing Corp. (CMHC).
Chart: Reed Construction Data - CanaData.

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