Thursday, November 08, 2007

Q3 Adjusted New Home Inventory based on Cancellations

by Bill McBride on 11/08/2007 02:04:00 PM

The Census Bureau, during periods of rising cancellation rates, overstates New Home sales and understates the increase in inventory. Conversely, during periods of declining cancellation rates, the Census Bureau understates sales. Here is discussion from the the Census Bureau on cancellations. Note: this shouldn't be confused with revisions that are unrelated to cancellations.

Using cancellation rates from several of the publicly traded home builders, we can estimate the actual new home inventory (as opposed to the inventory reported by the Census Bureau). Note: The Census Bureau breaks down the inventory as Completed, Under Construction, and Not Started. The following chart show the reported and cancellation adjusted inventory levels for the hard inventory (excluding the "Not Started" category).

Adjusted New Home Inventory Click on graph for larger image.

At the end of Q3, this analysis shows the Census Bureau is currently understating the hard inventory of new home sales by about 100,000 units. Even though the Census Bureau data indicated a slight decline in new home inventory in the third quarter, the adjusted inventory increased because of rising cancellation rates.

Adjusted New Home Months of Supply
The second graph shows the reported Months of Supply for new homes, and the adjusted Months of Supply based on homebuilder cancellations. At the end of Q3, the Census Bureau reported the seasonally adjusted Months of Supply for new homes was 8.3 months. Adjusting for cancellations, the actual months of supply was 11.0 months!

However, it isn't just the inventory of new homes for sale that will impact the homebuilders. Existing homes are a competing product for new homes, and the record inventory of existing homes for sale will also pressure home-building activity. Also, it's not just the level of inventory that matters, but also the level of distressed inventory. We are already seeing record levels of foreclosures in some states, and IMO it is about to get much worse. I'll have more on total and distressed inventory soon.