Friday, April 24, 2009

Home Inventories Continue To Plunge

New home sales fell a tad in March to a 356,000 annual pace from February's pace of 358,000, which was revised upward from 337,000. Forecasts were for a 337,000 pace. Sales are stabilizing but at record low levels; the record high was 1.389 million in July 2005.

Importantly, inventories continued to decline on an outright basis and are now near normal levels after having moved materially above in 2006. The total number of unsold homes was 311,000 in March, down from 328,000 in February and its lowest tally since January 2002. The peak was 570,000 in June 2006.

The current level is below both the 25-year average of 355,000 and the 15-year average of 369,000. Inventories are falling because builders are severely under-building relative to population growth and household formation.

I ask again, where will the country's 3 million additional inhabitants live when they enter the country this year? It is a simple fact of human existence that people need shelter. Inventories will fall.

I therefore am sticking firmly with the idea that inventories have peaked and will continue to move downward in the time ahead based on this very bankable top-down theme. At least 500,000 and probably closer to 700,000 homes will be removed from the inventory problem by year's end.

Skeptics will say that foreclosure sales, phantom inventory (homes that people would like to sell but can't) and difficulties obtaining credit will stymie this trend. That misses the main point regarding the need for shelter: People will fill up empty space one way or another, whether through renting or buying. Sales needn't increase to fix the inventory problem, although sales are obviously needed to let the inventory dynamic take power over forced sales from a price perspective.

Still, supply ultimately will win out and it is shrinking for both new and existing homes, despite the very factors that skeptics say will stymie the decline. This shows their premise is false.

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