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Tuesday, March 18, 2008

Housing Starts, New Home Sales and Cancellations

by Calculated Risk on 3/18/2008 04:58:00 PM

It appears starts of single family homes (built for sale) have fallen below the current new home sales rate. This would imply that the inventory for new homes has started to decline (my quick estimate is that new home inventory is currently declining at about a 100 thousand annual rate).

But how high is inventory?

New Home Sales Inventory Click on graph for larger image.

This graph shows the inventory level as reported by the Census Bureau. The Census Bureau reported there were 482,000 units in inventory at the end of January.

From the graph, it appears that inventory has already been falling. However, inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again near record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 108 thousand higher.

Cancellations and InventoryThe second graph shows my adjusted inventory estimate using cancellation rates from several of the large public builders.

This suggests that inventory levels have been declining slightly (as of Q4 2007), but are still near record levels. Unfortunately this number can only be calculated on a quarterly basis, and not until the homebuilders file their quarterly reports with the SEC.

Also note that most condominiums are not included in new home inventory (or new home sales) from the Census Bureau. Areas with significant condominium developments probably have higher levels of inventory.

New Home Sales Months of Inventory Another method of looking at inventory is to consider the "months of supply". This graphs shows the month of supply based on the data from the Census Bureau (does not include cancellation adjustment). At the end of January, the months of supply was 9.9 months; significantly above the normal range of 4 to 6 months.

If sales hold at steady at 600 thousand Seasonally Adjusted Annual Rate (SAAR), a six months supply would be an inventory of 300 thousand units. Based on the Census Bureau reported inventory level, this would mean a decline of 182 thousand units. (Based on the cancellation adjusted levels, add another 108 thousand units or so).

So even though the homebuilders appear to be working off inventory, it is at a very slow pace compared to the number of excess units. Even if sales hold steady, starts of single family homes (built for sale) probably will decline further as builders work to reduce inventory.

Of course homebuilders are providing incentives and cutting prices to move inventory. As an example, this is from DR Horton:

The UnAuction

Click on image to visit Horton site. (hat tip Ramsey Su)

UPTO 50% OFF. I'm sure the previous home buyers are excited to see a half off sale.