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Minyan Mailbag - Housing Data



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next contribution from Mike Shedlock with that very intent.

A closer look at the latest housing data

Recent evidence suggests that the housing market has peaked.
1. New home inventory is rising
2. Fewer new homes being are being sold
3. New homes are being sold later in the process
4. Builders own and control more surplus land.

1. New home inventory is rising

There was a 4.8 month inventory of unsold homes at the end of December. This is highest level of inventory since June 2000.

There were 432,000 new houses for sale at the end of December. That matches the record set all the way back in July and August of 1973.

2. Fewer new homes being are being sold

The cyclical peak may have been reached in 2004 with 1183K homes were sold vs. 1086K homes sold in 2003.

The adjusted numbers dropped off considerably at the end of 2004 as interest rates rose slightly. Home sales are now below those for December 2003.

The sales drop off was greatest in the South, which up until now had been showing the strongest growth in new home construction.

Oversupply now appears to be a potential national problem.

3. New homes are being sold later in the process

Home builders would much rather sell homes before they start them. That way they can build to the customer's order and be confident they'll have a buyer before committing investment capital. They absolutely do not want to get stuck with completed unsold homes because they have to pay interest on the debt incurred to build those homes.

Let's take a look at what is actually happening.
75K homes were sold in December 2003: 29K were not yet started, 28K were under construction, and 18K were completed.
72K homes were sold in December 2004: 26K were not yet started, 25K were under construction, and 21K were completed.

Here is the trend of pre-construction sales going back to March 2004:

Mar 53K, Apr 49K, May 42K, Jun 42K, Jul 38K, Aug 35K, Sep 33K, Oct 37K, Nov 31K, Dec 26K.

Those figures show a 50% steadily declining drop of pre-construction sales heading back to March 2004!

4. Builders own and control more surplus land.

Housing starts rebounded in December, but that simply led to more unsold homes under construction.

Home builders may have gotten carried away with land purchases in 2004. If so, they might have far too much capital tied up in land and land options.

Looking at lots controlled at several builders we see:

Centex (CTX): 257,921 lots, up 49% from 2003, 7.84 years worth of supply based on 2004 sales.
D R Horton (DH)I: 268,000 lots, up 50% from 2003, 6.09 years worth of supply based on 2004 sales.
Beazer (BZH): 48,426 lots, up 14% from 2003, 5.51 years worth of supply based on 2004 sales.
NVR (NVR): 83,500 lots, up 19% from 2003, 6.55 years worth of supply based on 2004 sales.

Home builders have six to eight years of land supply and are adding to it even as sales are falling.

The debt incurred to purchase and control those lots may bite into homebuilder earnings for years to come.

Here are two articles for Minyans consider:

U.S. Dec. new home sales flat as inventories build

Graphically oriented Minyans who like charts (isn't that all of us?) may appreciate the following article by the Northern Trust.

Data Suggest that Housing Market Is Vulnerable

Following is the official U.S. Govt. Housing Data for Dec.

New Residential Sales In December 2004

Historical Inventory and Sales Data back to 1973

Minyan Michael Shedlock

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