| The Latest New Home Stats Point to a Demand Problem |
| Written by Jonathan Smoke | |
| 09.25.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported the preliminary August new home sales statistics today. Sales of new homes in August were at a seasonally adjusted annual rate of 460,000 units, which is 11.5% below the revised July rate of 520,000 and is 34.5% below the August 2007 rate of 702,000. The monthly reported change is not statistically significant but the year-over-year decline is. Because of the decline in the seasonally adjusted pace of new home sales, the seasonally adjusted measure of supply increased to 10.9 months from 10.3 months in July. That number is not statistically significant given the wide margin of error in the survey sampling method employed by the Commerce Department. While months’ supply is an important metric to follow, it tells you how long it would take to sell the amount of homes for sale given the current pace of sales. We know that the pace of sales is depressed, and even though the month-over-month decline was double digits, it is still within the margin of error. Just like the presidential race, it’s too close to call on whether the rate of sales actually went down or up or stayed the same. If we set pace aside, we can at least take comfort that the inventory levels continue to decline. The blue bars on the chart below show the total estimated number of new homes for sale at the end of each period. The red line on the right axis shows that the inventory number has declined each month for over a year even though the pace of sales has been anemic. So what’s my conclusion? New home construction is under control and responding appropriately to market conditions. There is too much inventory given the depressed demand conditions, but for inventory levels to continue to fall we know that at least conditions are not getting worse on the supply side. And when demand returns, even to normal levels, the excess supply will burn off quickly. Over the 45+ years of new home sales data from the Commerce Department, the average monthly pace of sales is approximately 58,000 homes. If that average historical pace were used in our current months’ supply calculation, we’d have 7 months’ supply, a figure many consider to be in a healthy range. While many continue to claim housing has a supply problem, it doesn’t. Housing has a demand problem. 
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