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The inventory of new homes for sale reached a record
level in January, with the supply (at the January
sales pace) moving above five months for the first
time in nearly 10 years, according to the latest
Census Bureau figures. In addition, the median
length of time that completed new homes were sitting
on the market moved up to 4.5 months. But at least
one observer says the trend, though serious, isn't
as bad as it seems. Kent Colton, a senior scholar at
Harvard University's Joint Center for Housing
Studies, says less than one in four of the inventory
is actually completed and sitting idle. The rest
either haven't been started yet or are still under
construction.
Of the unsold houses, he said, only 22 percent are
finished, sitting empty and waiting for occupants.
Of the remainder, 58 percent are still in the
process of being built and 20 percent haven't been
started. "It's a serious problem," he
said. "But it's not as dramatic as it
looks." That the Census Bureau's new-home
inventory estimates include units that are for sale,
but not yet started, "takes some sting"
out of the inventory "overhang," the
National Association of Home Builders agrees. But in
an electronic message to members last week, NAHB
economists pointed out that the inventory of units
completed or under construction also is at a record
level. Furthermore, they noted, sales that are
subsequently cancelled never get back into the
government's inventory estimates, "and it's
clear that cancellations have been on the rise,
too." In February, NAHB surveyed nearly 500
single-family builders about unsold inventories.
Excluding units not-yet-started but including units
handed back buy buyers who have changed their minds,
more than a third of the respondents said their
inventories were higher than six months earlier,
while less than one-fifth said their inventories had
come down over that period. But one of five builders
also reported that their cancellation rates were
higher in January than six months earlier, while
only 8 percent said their cancellation rate was down
over that period. In order of importance, the
reasons given for the kick-outs were: The buyer
could not sell an existing house, the buyer could
not qualify for a mortgage, the buyer changed his
mind, family circumstances changed, or there had
been a change in the buyer's employment. In
addition, a supplementary NAHB canvass of about 30
large single-family home builders showed that, in
January, cancellation rates (cancellations as a
percent of sales backlog) were up by about
one-third, on average, from historically low levels
of a year earlier.
"That trend, if it continues, accentuates the
need for builders to control speculative building
during the period ahead and to employ incentives to
support sales and limit cancellations," the
association's economic department warned. Colton,
meanwhile, believes the new home market is simply
moving back to a period of normalcy, even in places
like Washington, D.C., where the backlog of unsold
units was at 7,000 a year ago but now totals 17,500.
"Clearly there's a softness," he said.
"But a year ago, inventories were very, very
low." Colton said that rising inventories are
likely to cause a 10 percent decline in housing
starts this year, from about 1.7 million in 2005 to
1.543 million in 2006. But even at that, this year
will go down as the third strongest year ever in
terms of starts, he said. "It's not like the
market is dropping to panic levels." The
long-time housing observer, who was executive vice
president of NAHB for 10 years before leaving in
1999, doesn't believe the market will fall because
it is "supported by solid, overall
demographics." Indeed, strong fundamentals and
equally strong household growth are likely to fuel
the housing market well into the middle of the next
decade, he said. Some 19.9 million new household
will likely be formed over the next 10 years.
"A rate of 1.9 million a year signifies very
strong demand," Colton said.
Though the Harvard scholar expects interest rates to
be at or near the 7 percent level by this time next
year, he doesn't believe rising rates will be
responsible for the slow down. Rather, he said, it
will be the inability of buyers to afford
ever-rising house prices at any rate. "As long
as long-term mortgage rates remain below 7 percent,
we'll be okay," he explained. "But at some
point, consumers will no longer be able to keep up
with the high level of price appreciation. There has
to be some adjustment." Using the old standard
that home buyers can afford a house priced at three
times their income. Colton noted that in 1999, the
median household income was at or more than three
times the median house price in 74 of 110 major
metro areas. By 2004, however, the ratio had fallen
from 67 percent to 39 percent, or just 43 of the 110
markets. "Clearly, affordability is the major
issue," he said. "House prices have
catapulted ahead of incomes in many metro
areas."
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