New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru August 2013)
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NOTE: You may be reading an outdated analysis.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 July 2011, the number of new homes sales was in a confirmed upward trend, rising by about 6,800 per month, but the two latest readings were both too low to include in that trend. We’ll have to hope a new downtrend doesn’t materialize. The months of supply of new homes was in a confirmed upward trend between January and August. The sales numbers are nowhere near a good level, but it is encouraging that we have been mostly headed upward, but the two low readings are cause for some concern. The current months of supply, even though it’s rising, is still low and suggests that new residential homes prices should rise 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 | Jul 2011 – June 2013 - During that time, there was a confirmed upward trend, with the seasonally adjusted annual rate of new homes sales rising by about 6,800 per month. But the two latest readings were both too low to include in this trend. | Jan – August 2013 – During that time, there was a confirmed upward trend, with the new homes inventory months of supply increasing by about 0.16 per month. |
| Last Confirmed Trend | Apr 2011 – Jul 2011 – During that time, the seasonally adjusted annual rate of new homes sales was falling by about 4,600 per month. | Mar 2011 – Jul 2012 – During that time, the new homes inventory months of supply was decreasing by about 0.17 per month. |
| Projected Next Data Point (assumes recent trend continues, excluding any off trend data points) | September 2013: 473,000 annual rate (up 52,000 from latest) | September 2013: 5.2 months (up by 0.2 months from latest) |
Easy Take
The latest report for August was encouraging only if you compare it to the previous month. With the downward revisions made to recent months, it was overall a second straight weak report. Does this mean the housing recovery is over? That’s unlikely given generally encouraging trends seen in the economy, but it could represent some slowing in the housing recovery in the near term.
The overall picture is still somewhat good news – the number of new homes sold is rising, while the months of supply remains low enough to be considered normal. The potentially concerning news is that the latest two reports showed a lower-than-trend number of sales. We see that the rate of new homes sold has been moving upward (confirmed), while the months of supply is also moving upward. Fortunately, the months of supply is still well below the “normal” supply of about 6 months, so it’s not a bad thing if it moves back up a bit closer to the norm, as long as it doesn’t move higher than 6 months.
Through last month’s report for August, we have a confirmed upward (good) trend in the number of new homes sold, but the two latest readings were too low and put the rising trend at risk of breaking. We still have a confirmed upward (bad) trend in the months of supply for inventory, but it’s at a low level so not really concerning. 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 even if the trend was moving in the right direction recently, 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) being low 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 be on a stable, rising path.
We are 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 5.0 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 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! We’ve started to move back up toward that 6 month level, and that’s fine, as it benefits the economy when things are in equilibrium.
