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The U.S. Inventory of Unsold New Homes Achieved a Key Milestone in May

06/25/2012 by Alex Carrick, RCD Canadian Chief Economist

How much better is the U.S. new homes market? It’s taken six-and-a-half years to achieve, but it can finally be reported that market equilibrium – after a fashion – has been restored.

The graphs accompanying this article tell the story. The statistics quoted are from monthly press releases issued jointly by the Census Bureau and the Department of Housing and Urban Development.

The number of unsold new homes started climbing in 2004 (Graph 1). That wasn’t a problem at first because sales stayed strong (Graph 2).

As a result the “number-of-months inventory” – the key leading indicator that is the focus of this article – remained near its historical norm (4.5) until the end of 2005.

However, the seeds of the downturn were already being sown. Prices were being bid up by speculators in 2004 and 2005.

At the beginning of 2006, the rot set in. Price bubbles burst in resort markets such as Nevada, Arizona and Florida.

In 2007, the sub-prime mortgage crisis reared up to turn a normal housing downturn into a rout.

The number-of-months inventory figure – which is the unsold-homes level divided by the current month’s sales rate – climbed alarmingly throughout 2006, 2007 and 2008.

It maxed out at slightly more than 12 months in January 2009.

In other words, after the stroke of midnight New Year’s Eve, everyone in the homebuilding industry in the U.S. could have taken the ensuing year off.

Since then, there have been more than three years of correction. It became painful to watch, not least of all because the vast degree of improvement still required was so obvious.

The market wasn’t going to become healthier again until the inventory level returned to its old ratio (4.5).

There was one dramatically better period culminating in April 2010’s 6.2-month figure, but it was short-lived. A special circumstance had provided only temporary relief. 

A $10,000 first-time home-buyer tax credit expired in the spring of 2010 after being extended from an earlier deadline in the fall of 2009.

The difficult process of lowering the number-of-months inventory began anew in May 2010 and has proceeded in stages over the past two years.

New home sales, after falling from early 2006 through 2008, finally touched bottom around 300,000 units in early 2009. Then they nested there.

Until the most recent couple of months, they’ve hardly shown any zest for a comeback.

Therefore, for the inventory figure to improve, it’s been left to the numerator – the number of unsold houses – to undergo all the adjusting.

And that’s what has happened. The number of unsold new homes has fallen progressively since early 2007.

The level of unsold new homes is now remarkably low, only 145,000 units in all the U.S. That’s less than half the level reached in previous housing market declines.

All of the foregoing brings us to the present. May’s 4.7 months of unsold inventory is the lowest reading for this crucial indicator since October 2005’s 4.5 months.

Most important, the number-of-months inventory has been restored to a position matching what occurs when the overall homebuilding sector is in balance.

The market has returned to where supply (as low as it may be) is well matched with demand (as weak as it still is).

There’s plenty of room for improvement on the buyer side. There can be no doubt about that.  

But at least some measure of equilibrium is at hand.

It can hardly be overstated how important a stable, let alone improving, homebuilding sector is for the U.S. economy.

If new home starts were anything like their normal level of 1.5 million units, seasonally adjusted and annualized, there would be two million more jobs – one million in the field and an equal number in design services (architectural and engineering), financial services (real estate, legal and accounting) and manufacturing (building products).

Just as important, an improving homebuilding sector would assuredly be accompanied by a firming of prices.

The positive implications on that count would begin with individual and family balance sheets and be magnified through stronger confidence levels into more robust retail sales and consumer spending.  

U.S. new home inventory – May 2012
U.S. new home inventory – May 2012
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.

U.S. new homes sold – May 2012
U.S. new homes sold – May 2012
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.


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