New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru February 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NOTE: You may be reading an outdated analysis.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.
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:
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:
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
Quick ‘n Easy
Since June 2012, the number of new homes sales was in a confirmed upward trend, rising by about 7,300 per month. Since September 2012, the months of supply of new homes is not in a trend with at least 50 percent confidence, so it is difficult to judge. The sales numbers are nowhere near a good level, but it is encouraging that we have been headed upward. The current months of supply 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:
|New Homes Sales||New Homes Inventory Months of Supply|
|Current Trend||Jun 2012 – Feb 2013 - During that time, there was a confirmed upward trend, with the seasonally adjusted annual rate of new homes sales rising by about 7,300 per month.||No trends with at least 50 percent confidence|
|Last Confirmed Trend||Aug 2011 – May 2012 – During that time, the seasonally adjusted annual rate of new homes sales was rising by about 8,300 per month.||Mar – Sep 2012 – During that time, the new homes inventory months of supply was decreasing by about 0.05 per month.|
|Projected Next Data Point (assumes recent trend continues, excluding any off trend data points)||March 2013: 420,000 annual rate (up 9,000 from latest)||February 2013: No projection because no trend|
Good news – the number of new homes sold is rising, while the months of supply remains low enough to be considered normal. The February 2013 report came in below expectations on the number of new homes sold, but it was right on the current rising trend, so no worries. We see that the rate of new home sold is definitely moving upward (confirmed), but the months of supply has been up and down. We don’t have a trend yet to make any conclusions on the months of supply.
It’s hard to imagine we’ll see the months of supply move down from the 4.5-5.0 area for any sustainable period of time. It’s really tough to get that figure much lower. It’s already low enough to put upward pressure on new home prices that we need to see, and with the latest 4.4 months level, it doesn’t make sense to expect it to go much lower from here.
Through last month’s report for February, we have a confirmed upward (good) trend in the number of new homes sold but no trend in the months of supply for inventory. 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 stabilize and even return to a sustainable 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 4.4 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! It’s probably naive to think this supply number is going to go much lower from here. And that’s fine, as it benefits the economy when things are in equilibrium.