Thursday, December 10, 2009

A Housing Comeback

When the government's housing statistics are reported, the media focus on the number of sales and the average or median selling prices of those sales. This is probably because they are focused on the health of short-term demand and current consumer confidence within the context of the overall economy. But for those specifically interested in gauging the health of the housing industry going forward, it is far more useful to consider inventory data.

For example, could you have seen (and thereby avoided) a housing bubble collapse, armed with the following inventory data at the beginning of 2007?

Clearly, new home inventories were out of line with even the recent historical past. But new home sales were brisk and prices were rising, so many simply believed the trend would continue.

Now fast forward a couple of years, and the opposite situation appears to exist. Home builders have stopped building over the last year, and new home sales have outpaced new home construction as a result. This has led to a drop in new home inventories to levels not seen since the 1960s:

Does this mean home builders can soon start charging a premium and can print money like its 2006? Absolutely not. In addition to the fact that demand for homes is low due to consumer confidence/unemployment issues, new homes are currently competing with foreclosed homes, of which there is an abundant supply. What this data does suggest, however, is that home builders that managed to survive the downturn will likely soon be in a position for healthy growth; in the medium-term, these inventories will have to rebound, which will have positive effects on the housing industry and the general economy.

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