New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru August 2012)
Sales of new residential homes contributes to the GDP, and the level of supply can indicate something about prices. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator (in this one, it is new residential homes sales and inventory) and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.
NOTE: You may be reading an outdated analysis. Please visit my latest new residential homes inventory months of supply trend analysis for more info.
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Quick ‘n Easy For new residential homes reports, there are two key things to look at: 1) number of homes sold and 2) inventory of homes for sale. When there are too many new residential homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand. A good way of measuring the inventory is to calculate how long it would take that inventory to sell at the current pace of sales. The normal level of supply for new residential homes is a little less than 6 months. |
For new residential homes reports, there are two key things to look at: 1) number of homes sold and 2) inventory of homes for sale. We care about the number sold because each one contributes to the overall economy (builders get paid, brokers get paid, companies that made the raw materials get paid, etc). We care about inventory because when there are too many new residential homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand. The opposite is true if there is very low inventory. A good way of measuring whether current levels of new residential homes are too high or too low is to calculate how long it would take the current inventory to sell at the current annual pace of sales. For example, if there are 150,000 unsold new residential homes with the most recent report saying the annual pace of sales was 225,000, here’s what the calculation would look like:
Example:
225,000 new residential homes sold per year
divide by 12 to get 18,750 new residential homes sold per month
150,000 unsold homes divided by 18,750 sold per month = 8 months supply
Here’s a graph of the New Residential Homes Sales followed by Inventory Months of Supply from Calculated Risk:
Courtesy: CalculatedRiskBlog.com
Courtesy: CalculatedRiskBlog.com
New Residential Homes Trends and Projections
Below, I will discuss whether the indicators are currently in a trend, when the last confirmed trend was and what that says about projecting the next data points to be released.
New Residential Homes Trend Analysis
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Quick ‘n Easy Since mid-2011, both the number of new homes sold and the months of supply have both generally been trending in the right direction. Number of new homes sales was rising by about 7,000 per month, while months of supply was dropping by about 0.08 per month in their most recent trends. Unfortunately, the latest reading for new home sales in August came in too low to be considered part of the rising trend. Look for a possible change in the trend there soon. The sales numbers are nowhere near a good level, but it is encouraging that we have been headed upward. The current months of supply suggests that new residential homes prices should either stay about the same or rise slightly in the coming months. |
Here is a chart of the recent trends in both the new residential homes sales numbers and inventory months of supply:
Source Data: U.S. Census Bureau
Source Data: U.S. Census Bureau
| New Homes Sales | New Homes Inventory Months of Supply | |
| Current Trend | Aug 2011 – July 2012 - During that time, there was a confirmed upward trend, with the seasonally adjusted annual rate of new homes sales rising by about 7,000 per month. But the latest month’s reading was too low to be considered part of the rising trend. | Feb – Aug 2012 - During that time, there was a confirmed downward trend, with the new homes inventory months of supply decreasing by about 0.08 per month. |
| Last Confirmed Trend | Apr – Aug 2011 – During that time, the seasonally adjusted annual rate of new homes sales was falling by about 5,100 per month. | Jul 2011 – Feb 2012 – During that time, the new homes inventory months of supply was decreasing by about 0.27 per month. |
| Projected Next Data Point (assumes recent trend continues, excluding any off trend data points) | September 2012: 394,200 annual rate (up 21,200 from latest) | September 2012: 4.4 months of supply (down 0.1 from latest) |
Easy Take
Last week, it looked as though the trend in lower months of supply of inventory was going to end with this month’s report, but fortunately after revisions and a nice low number again for August, that trend is intact.
The situation with new homes was trending in the right direction through July, but the August number of new homes sold was too low to consider part of a rising trend. It’s the third straight reading that appears below the trend line at some distance or another, so don’t be surprised to see a change for the worse soon. It’s not surprising to see the inventory months of supply stalling its decline around the 4.5 area. It’s really tough to get that figure much lower really. It’s already low enough to put upward pressure on new home prices that we need to see.
Through last month’s report for August, we are seeing a confirmed rising trend in the number of new homes sold (except for the latest month) and a confirmed downtrend in the months of supply for inventory. The first part of that (number of homes sold) is good for the economy, pouring money into the pockets of those who make the materials that go into building homes, the home builders, the architects, the real estate agents, etc. But just because the trend is in good shape, it doesn’t mean we’re actually in a good place. It will probably take years before we get to a good place.
The second part (inventory) is good because it keeps prices from going down. Remember, if there is less inventory, that means less supply. Supply and demand rules dictate that lower supply supports higher prices. A huge component of most people’s net worth is the value of their home. To get the balance sheets for US households back in order, we need housing prices to stabilize and even return to a sustainable rising path.
We are now sitting below the stabilization point of 6 months of supply of new residential homes. At the most recent pace of sales, it would take about 4.5 months to sell off the remaining unsold inventory of new residential homes. That’s below the level at which prices generally stabilize. This means that prices of new residential homes are likely to stay stable or even slightly rise. We have to be pleased that the market has done its job of properly adjusting the level of new residential homes being built so that the inventory number stays very close to normal. The months of supply was as high as 12 in the recession a few years ago! It’s probably naive to think this supply number is going to go much lower from here. And that’s fine, as it benefits the economy when things are in equilibrium.
