A huge boom in housing construction may be about to create a glut in the market.
The inventory of unsold new homes doesn’t look too scary when you view it the conventional way, namely, in proportion to the rate of new-home sales. In November, the inventory added up to 4.9 months’ worth of new-home sales, vs. 4.3 months’ worth one year earlier.
But the inventory looks scarier when you look at the actual number of unsold homes—503,000, seasonally adjusted, in November. That’s up from around 350,000 in the early 1990s, the last time there was a glut.
The only reason there isn’t a glut so far this time is that the rate of sales remains strong. But if the rate of housing sales drops, the inventory is likely to pile up faster than builders can dial back on construction. That’s what happened in 1991, when the inventory of new homes topped out at more than nine months’ supply. Now, with a lot more homes in the market, it’s easy to imagine the ratio of inventory to monthly sales getting even higher.
Thanks to John Burns of John Burns Real Estate Consulting Inc. (who, by the way, is not a housing bear) for pointing out this issue.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.