| Decomposing the Inventory of New Homes for Sale |
| Written by Jonathan Smoke | |
| 09.25.2008 | |
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Discuss this article on the forums. (0 posts) In a continuation of the piece I wrote yesterday about the latest government stats on new home sales and inventory levels, I thought it would be worthwhile to drill into the inventory numbers. A house is considered for sale when a permit has been issued and a sales contract has not been signed nor a deposit accepted. In other words, the Commerce Department numbers on “new homes for sale” reveal the amount of speculative building. Granted, a portion of these aren’t necessarily speculative—some had contracts but were cancelled, some are for models and some are a result of needing to start a new phase or community before sales can begin. Therefore, it is very relevant for us to look at the composition of these inventory units. The following chart breaks down the total homes for sale by categories of “Not Started” (permit pulled but no work begun), “Under Construction” (started but not completed) and “Completed.” In this chart we can still see that the total inventory of new homes for sale has fallen over the last year. The blue, not started, numbers have been fairly consistent but even they are substantially lower now than last year. Builders often pull permits early when permits are not costly so that they then have more flexibility over deciding when and if to start. Think of that as an option to start the home without experiencing permitting delays. As such, this category is somewhat irrelevant. But since permitting has fallen dramatically over the last year, even this category is down. The amount of homes under construction has fallen dramatically since last year. The August 2008 estimate of 181,000 homes is 33% below the August 2007 estimate of 270,000 homes. Finally, the number of completed inventory units has declined, but not as much as under construction even though completed fell 8.8% from July to August. While both under construction and completed units burn significant interest carry, the completed units put the greatest pressure on pricing. It is impossible to have no inventory. That’s why six to eight months’ of supply is considered healthy in most markets. I would expect that we will continue to see the amount of homes under construction continue to fall as long as demand is depressed and credit is tight, but I don’t expect the number of completed homes to fall as much. 
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