In today’s U.S. government media release on new home sales, there was further evidence of improvement in the national housing market, although the degree of change may have been only slight. The number of unsold single-family new homes declined again, in a continuation of a pattern that has been apparent since early 2006. The level of unsold homes (262,000 units) is now significantly lower than at any earlier time in this decade.

The level of new home sales has been gently sloping upward since the first quarter of this year. While the number of new homes sold in August (429,000 units) was quite low compared with historical levels – i.e., only about one-third − it was up by 30% compared with the trough figure (only 329,000 units) that occurred in January of this year.

Number-of-months Inventory Drops Again

The drop in unsold homes and the rise in sales have resulted in another improvement in the number-of-months of unsold inventory, to 7.3 in August versus 7.6 in July. At its peak in January 2009, the inventory of unsold homes was 12.4 months. The equilibrium level at which there is a good demand-supply balance in the marketplace is usually 4.5 months. Hence, inventories have adjusted two-thirds of the way down to where they need to be.

Still Big Problems, but Improvement Nevertheless

There are still big problems in the U.S. housing market. Way too many homes are carrying market values that are below their outstanding mortgage amounts. House prices have been deeply depressed in many regions and are only slowly on the mend. And there will be further foreclosures due to earlier Alt-A mortgage approvals where family incomes in these depressed labor markets are not able to keep up with scheduled payments. 

Nevertheless, a significant improvement with regard to surplus unsold stock and a shift to better sales is starting to take place. This is well-illustrated in the two accompanying graphs. Housing starts have lately been sticking at around 600,000 units annualized each month and this is quite good news for the economy. Even lumber prices, an early bellwether indicator for future markets, are starting to tentatively move up. By the way, this is something to keep an eye on, since lumber inventories have been really depleted.