New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru July 2014)
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NOTE: You may be reading an outdated analysis.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. I usually start my trend analysis from about three years ago.
New Residential Homes Trend Analysis
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Quick ‘n Easy The number of new homes sales is currently in an unconfirmed downward (bad) trend from May thru Jul 2014. From May thru Jul 2014, the months of supply of new homes was possibly in a rapid rise, unconfirmed upward trend. Because I want to see readings move toward equilibrium (6 months supply), I would classify the current trend as favorable but as it is about to cross above 6 months, it would quickly become unfavorable next month. The sales numbers are still too low, and it’s concerning that the trend is pointed downward. The current months of supply is very close to equilibrium, so prices should be fairly stable here. |
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 | May – Jul 2014 - During that time, there was an unconfirmed downward trend, with the seasonally adjusted annual rate of new homes sales falling by about 21,000 per month. The confidence level for this trend is about 82 percent. | May – Jul 2014 – During that time, there was an unconfirmed upward trend, with the new homes inventory months of supply increasing by about 0.45 per month. Because I want to see readings move toward equilibrium, I would classify the current trend as favorable – though if it actually continued next month, it would become unfavorable. |
| Last Confirmed Trend | Jan - Mar 2014 – During that time, the seasonally adjusted annual rate of new homes sales was dropping by about 28,000 per month. | Jul 2013 – Jan 2014 – During that time, the new homes inventory months of supply was decreasing by about 0.12 per month. |
| Projected Next Data Point (assumes recent trend continues, excluding any off trend data points) | Aug 2014: 387,000 annual rate (down 25,000 from latest) | Aug 2014: 6.5 months (up 0.48 from latest) |
Easy Take
The latest report for July was slightly worse than expectations for the number of new homes sold (although the previous two months’ numbers were revised upward – so on net about as expected). The latest month’s pace of homes sold was 10,000 fewer than the previous month and 18,000 fewer than economists had expected. We now see a downward (bad) trend for sales – concerning, because we need to see that number rising. The inventory months of supply is moving in the “right” direction, as I always want to see us move toward equilibrium (6 months). In fact, we’re now basically right at equilibrium, so this level will hopefully level out otherwise it will become an unfavorable trend.
The first chart shown above (number of homes sold) needs to rise because it’s 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 were moving in the right direction, it wouldn’t mean we’re actually in a good place. It will probably take many months or even a few years before we get to a good place.
The second chart (inventory) is where we want to see a value right at 6 months, which 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.
At the most recent pace of sales, it would take about 6.0 months to sell off the remaining unsold inventory of new residential homes. That’s virtually at the level at which prices generally stabilize. This means that prices of new residential homes are likely to remain stable in the near term. The months of supply was as high as 12 in the recession a few years ago! I’d like to see us stay near the 6 month level, as it benefits the economy when things are in equilibrium.
