Monday 25 June 2012

Some Positive Signs in Today's New Home Sales Report for a Significantly Improving Housing Market

One interesting data point from today's Census report on new home sales is the very low inventory level of homes for sale: there is currently only a 4.72 months' supply of new homes for sale at the current sales pace, which is calculated as the ratio of new houses for sale at the end of the month (145,000) to the number of homes sold in May (30,750 at a seasonally adjusted rate).  The inventory of new homes relative to demand hasn't been that low since October 2005, more than six years ago (see chart above), and is an indication that the balance between the supply and demand for new homes has returned to a more typical level than the double-digit months' supply levels back in 2008 and 2009.  In fact, the average inventory since 1963 is a 6.2 month supply of new homes, so the current level of only 4.72 months' supply is below historical norms, and reflects a very low inventory level of new homes in relation to the rising demand. 

As Brian Wesbury and Robert Stein point out today,

"The lack of availability of completed new homes is likely holding back sales, which will improve even more as builders finish some of the homes now under construction. We see the same phenomenon in the existing home market, where a lack of homes on the MLS is temporarily holding back sales. The road ahead looks better than it has in years. Look for housing to continue to move higher, and to add to GDP for the fifth consecutive quarter."

Scott Grannis also reports today on new home sales in May, which were up by almost 20% from a year ago and reached the highest sales level in more than two years, and new home starts, which were up in May by more than 26% from last year, and comments:

"To be sure, the level of sales and starts remains very depressed from an historical perspective. But from an economist's perspective, it's not the level that is important, it is the change on the margin. Correctly viewed, there has been a very significant improvement in the housing market over the past few years."

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