Wednesday, December 24, 2008

Number of new homes for sale keeps falling….that’s good

Yesterday’s reports on new home sales and existing home sales were dismal (please see CR for the new home report and the existing home report), where new home sales dropped to 407,000 and existing home sales dropped to 4.49 million (8.6% drop). But the inventory numbers (supply) went under-reported; the only glimmer of hope across the two dreary reports is that the number of new homes for sale is falling back to trend.

The chart illustrates the reported inventory of new homes for sale and existing homes for sale through November 2008. The existing inventory is clearly troubling, and since it is roughly 10 times bigger than that of new homes, it is understandable why Joshua Shapiro of MFR, Inc. is concerned:
Inventories [of existing homes] are very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of weak demand and eroding prices. (Not to mention the considerable amount of inventory that is still tied up in the legal process surrounding foreclosure and therefore is not counted as being for sale, and the large number of homes that have already been purchased out of foreclosure by speculators but that will eventually hit the market.) –Joshua Shapiro, MFR Inc.
The inventory of existing home sales rose in November, and even worse, it remains elevated at peak levels. Rock bottom pricing is not driving sales quickly enough. The current trend in mortgage rates (downward) should instigate some positive demand from potential homebuyers!

On the other hand, the inventory of new homes for sale continues to move in the right direction – down! The number of new homes for sale, 374,000, are reverting back to their sample monthly average (1978-2008) of 350,000, rather than stabilizing at a peak as is the existing inventory. New construction at its slowest pace since 1959 (the beginning of the series) – November housing starts fell 18.9% over the month to 625,000 – and new home sales are dragging the inventory down.

Inventory of existing home sales is clearly troubling, especially if there are sellers waiting in the shadows to put their homes on the market when housing prices rise slightly (CR calls this shadow inventory). But the number of new homes for sale is clearly a step in the right direction.

Rebecca Wilder


  1. It is good that housing starts are getting back to "normal", whatever that is these days. One guy here got a killer deal on a new home - model home with all the upgrades - as opposed to a foreclosure. Won't have to do anything to the house (roof, HVAC, etc.) for many years where he would with an existing home. Less cash in the long run. We are still in the wait-and-see time so most don't want to make any moves.

  2. Looking at a number in isolation, say existing house inventory, shows a simplistic, meaningless analysis.

    What counts is one thing in relation to another, say the ratio of houses for sale (new + used) to unencumbered income (income less consumer debt) for those between 18-59.

    The total number of houses for sale might be high relative to the amount of cash that can service mortgage debt to buy such houses or it might not.

    Yet, never can you know this by looking at the inventory number alone.

    More meaningless analysis uses trend lines and moving averages taken from a single fact, say existing houses for sale, since such fake analysis leads to false beliefs.

    Instead, more meaning comes from a rate of change, say the ratio of houses for sale to unencumbered income between designated periods.

    Such a ratio tells magnitude and direction of whether potential buyers have sufficient incomes or not.

    If potential buyers lack sufficient income, inventories are too high, hence prices must fall.

    If potential buyers have sufficient income, inventories can grow. Prices can rise.