Monday, March 26, 2007

Largest Supply of New Homes Since 1995

Just a few days ago, I heard an analyst defend the home building industry. He said home builders were cutting back on construction in order to reduce inventories. He seemed certain business would soon pick up.

Not soon enough according to today's report from the Department of Commerce. It turns out that on a seasonally-adjusted and annualized basis, only an estimated 848,000 new homes were sold in February. That's down 3.9% from the revised January estimate, which is itself down 5.9% from the initial January estimate reported a month ago. At this rate, we could conceivably see today's figure eventually revised to less than 800,000.

Regardless of any future revisions, it is clear that problems persist in housing. While home builders may be reducing inventories, they are also selling fewer homes, which means supply is actually rising. In fact, according to the latest report, there is now an 8.1 months' supply of new homes on the market. That's the highest amount of supply since December 1995.

Amazingly, prices are holding up. In fact, February's median price of $250,000 was up 2.8% from January. But prices should be taken with a grain of salt. Home builders are making all kinds of concessions to move houses. They are throwing in every conceivable upgrade to hold the line on price.

What does this mean for the economy? I think the Fed will worry more about slowing growth than rising inflation. In my view, today's report raises the odds of a Fed rate cut by year-end.