New Homes: Time to Build?

Many more new homes are currently being purchased than they are being built. In fact, this process has been occurring for a span of almost two years now, as builders have slashed construction at a faster pace than buyers have reduced purchases. This has caused steadily decreasing housing inventories, as shown in the following chart:

Obviously, a continuation of this decrease in inventories is not sustainable, as eventually a scarcity of available homes will cause prices to rise and thus invite builders to ramp up construction, which is a bullish sign for the economy. However, that's not to say that such a turnaround is right around the corner. As we saw when we looked at new home inventories over the last two decades, the housing bubble caused a huge upsurge in inventories that buyers are still working their way through.

It is worth noting that the current inventory number still represents a full 10+ months of supply at the current pace of purchases vs just 7 months in January 2007. This is due to the fact that the number of purchases has dropped substantially, despite the now lower inventory level. However, housing demand does fluctuate dramatically; therefore, when judging the level of housing inventories from a long-term perspective, it is often more relevant to consider the absolute level (as shown in the above chart) rather than the months supply - the number often reported by the popular press.

Comments

[gmouse:]

That is some good data on new home inventory. And it looks like the downtrend will continue for a very long time considering the unemployment rate.

Jun 05 04:55 PM

[Old Trader:]

Maybe I'm just really dense, but I'm confused by how so much news about new home inventories ignores/glosses over the inventory of existing homes, as if there was some "law" that says home buyers ONLY have the option of buying a new home, or not buying at all.

As an aside, given the shoddy construction of most recent construction, if I were currently in the market, I'd much rather buy an existing, older home, and upgrade/remodel as required.

Jun 06 10:56 AM

[kjangelo:]

g

Jun 06 11:12 AM

[Tom Armistead:]

This information demonstrates that the homebuilders have been matching new construction to demand. At the same time, well-run operations such as TOL, RYL or KBH have been increasing their cash, positioning themselves for recovery.

It is possible that when the homebuilding industry starts to recover fashions in new homes will have changed, maybe fewer two story foyers and pretentious great rooms, less emphasis on how big a box of OSB you can wrap around how much air.

Its like fashions in cars or clothing - they change, and some people prefer to always have the latest thing. So, homebuilders that are well positioned may become profitable early in the recovery, due to lack of new home inventory.

Jun 06 11:46 AM

[Crude Oil T...:]

Time to build? I think we are closer to a time when homes will be to this recession/depression what hogs and wheat were to the last depression. Our "leaders" in Washington will buy them and bull doze them. Then we can build new homes.


stock-market-club.blog...

Jun 06 12:14 PM

[dirtyharry:]

The title of this article asks a question with such an obvious answer that I mistook it for a rhetorical question - and it's not. I find it bizarre in the middle of this economic downturn (yes, the middle, not the beginning, and not the ending phase) someone seriously questions whether or not it's time for homebuilders to begin building. The author ads that:

"Obviously, a continuation of this decrease in inventories is not sustainable, as eventually a scarcity of available homes will cause prices to rise and thus invite builders to ramp up construction"

I guess he hasn't heard that:

1) not everyone need to buy a brand new house
2) unemployment is still increasing by the 100,000's each month
3) the Option ARM wave of mortgage adjustments is going to BEGIN in Q4 of 2009 and last until at least Q2 of 2012

It's as if there's finally a chance for some of the pain to subside via reduced inventories, and the first thing the author wants to do is create more inventory. I'm sorry to be so blunt: This is nothing short of plain idiocy. This kind of overbuilding is what got us into trouble in the first place. The correct amount new houses we need right now, at this time, is ZERO. We have millions of homes sitting vacant in this country. What a travesty to suggest we should compound this problem further.

Jun 06 07:10 PM