New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru July 2015)
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NOTE: You may be reading an outdated analysis.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 not in a current trend, which is good compared to the possible downward trend it was in last month. Meanwhile, the months of supply of new homes is in a confirmed downward trend – not good news because I prefer to see things at equilibrium, which is above where we are. But the latest two readings suggest we may see that turn around and head toward equilibrium. So, new home prices are slightly pressured to rise from here, but that pressure may start being relieved soon. Overall, it’s a picture of a housing market that continues to heal and recover with occasional stumbles along the way. |
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 | No current trend with at least 50 percent confidence level. | Jul 2014 – May 2015. During that time, there was a confirmed downward trend, with the new homes inventory months of supply decreasing by about 0.11 per month. Because I want to see readings move toward equilibrium, I would classify this trend as unfavorable. Fortunately, the latest two readings were both too high to include in the downward trend. |
| Last Confirmed Trend | Nov 2014 – Feb 2015. During that time, the seasonally adjusted annual rate of new homes sales was rising by about 31,000 per month. | Oct 2013 – Apr 2014. During that time, the new homes inventory months of supply was increasing by about 0.12 per month. |
| Projected Next Data Point
—————- (assumes recent trend continues, excluding any off trend data points) |
Aug 2015: ??? annual rate (?? from latest)
————– Comment: No projection because there is no current trend. |
Aug 2015: 4.3 months (down 0.8 from latest)
——————- Comment: I prefer to see us move back upward toward equilibrium, and the fact that the last two readings accomplished this suggests to me that this projection is way too low. |
Easy Take
The latest report for July showed a pace of homes sold that was 26,000 higher than the previous month and 9,000 lower than economists had expected. We now see no current trend, which is an improvement over the unconfirmed downward trend we had as of last month. Meanwhile, the inventory months of supply came in too high for the second consecutive month to include in its recent confirmed downward trend. That’s good news because we’re already well below equilibrium, so new home prices are pressured to rise in the near future – not necessarily a good thing. I prefer to see us close to equilibrium when possible, and the data suggests we may be move back toward that.
This report demonstrates slight progress one front (number of homes sold) and potential progress on another (inventory months of supply). If you compare the numbers to the same month last year, it was significantly better. In fact, looking at the total number of new homes sold (without adjusting for seasonality), the total number sold in Jan-Jul 2015 is about 21 percent higher than Jan-Jul 2014. That’s an excellent increase!
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 when the trend is moving in the right direction, it doesn’t necessarily mean we’re actually in a good place. It will probably take many months 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 up/down too rapidly. 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 5.2 months to sell off the remaining unsold inventory of new residential homes. That’s below the level at which prices generally stabilize – and slightly farther from equilibrium of 6 months than we were last month. This means that prices of new residential homes are slightly pressured to rise 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 this near the 6 month level, as it benefits the economy when things are in equilibrium.
