Friday, June 5, 2009

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. 

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