| Assessing New Home Inventory Overhang |
| Written by Jonathan Smoke | |
| 09.11.2007 | |
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Discuss this article on the forums. (0 posts) A clear issue impacting new home sales and new home prices is the amount of new home inventories that resulted from frenzied permits and starts at the peak. The cure for such an overhang comes from time, a reduction in new permits and starts, and eventually an increase in sales.  An increase in sales pace doesn’t look likely in the foreseeable future as the pace of new home sales is also impacted by the pace of existing home sales and the amount of inventory available in existing homes. Because of investor sales and foreclosures, existing home inventories will not decline for some time.Therefore the astute investor with options for housing investments should be looking at markets where the overhang from recent years is minimal compared to markets where the overhang is clearly larger. In our monthly dashboard reports, we show a chart of expected single family permits against actual single family permits. We calculate expected single family permits using a simple model based on household growth. The chart shows a clear picture of just how far out of demand-supply equilibrium a market can get. For example, look at Jacksonville’s chart from our most recent report. From 2003 to early 2006, single family permits in Jacksonville exceeded what we would have expected from the household growth. Then starting in 2006, single-family permits dropped significantly, led in part by the mostly public builders who command the majority of the market share for new homes in Jacksonville. So looking at single family permits only, Jacksonville had a production bubble, but it also put the brakes on early in the downturn so that now the Jacksonville market has worked off a portion of its production excess. Since Jacksonville also had a surge in condo development, single-family permits may not paint the whole picture. I’ll add multifamily to the mix in my next post. 
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