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More and More Unsold Homes

Posted by: Peter Coy on January 10, 2006

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.

Reader Comments


January 12, 2006 1:47 PM

Seems like in Orlando Florida you can't go 100 feet with out seeing a sign reading "home for sale". Inventory is definately piling up, 9 year high in November and feels like its doubling... In Nov there were 4 homes for sale in our neighborhood. As of today Jan 12th 3 of those homes are still on the market & 4 more were added making 7 homes available in a neighborhood with only 42 homes in it. There are 3-4 more empty houses owned by speculators rumor has it will list this month and our neighborhood was built over 20 years ago. This same scene is on display in just about every neighborhood, especially ones built between 2002-today, "for sale" & "for rent" signs littering the streets and entrances infront of the developement. Even some large developements like Waterford Lakes & Avalon Park there are 2-3 homes for sale on every street.

Experts say it takes a major economic shock like a plant closing or major lay-offs to spark a decline in home prices. I think those experts are standing on a bubble itself... They don't realize that housing, real estate, mortgage & finance, furniture, appliances, everything related to real estate would take a huge hit if demand declined. The largest employers (outside of low paying tourism, agriculture, retail & service jobs) are in or directly related to new home construction and housing.

Your economic shock will be the housing market itself. If demand continues to slump and prices decline there are a lot of mortgage brokers, real estate agents, home builders, materials suppliers, and anyone else dependant on home sales who might just find themselves out of work.

Kevin Quail

January 12, 2006 2:14 PM

Our housing market is now somewhat dependent on China. China is diversifying away from US treasury debt; they are currently the second largest holder of US bonds after Japan. If they cut back on purchases of long term debt here, the Fed will be forced to raise interest rates more than the consensus to shore up the weakening dollar and curb the inflation that accompanies a devalued currency. Higher prices coupled with rising mortgage rates will put a lot of pressure on American households already burdened with too much debt and no savings.

The US Condo Exchange

January 13, 2006 12:53 PM

We see the housing market as highly regionalized. Those areas of the counry which are destinations for the baby boomers and those seeking second and third homes remain vibrant markets.

In New York, the market remains healthy, although the pace has definitely fallen from recent highs. The averge price has dipped a bit, but that seems to be primarily due to the percentage increase in smaller units changing hands, rather than the result of price adjustments of the units sold.


Javier Guadayol

January 14, 2006 4:10 PM

The average person does not realize the relationship between interest rates and the monthly payments of homes. Furthermore, there has not been a direct relationship between the increases in the discount rate of the past 12 or so months by the Federal Open Market Committee and the advertised and actual mortgage rates. Eventually, these will catch up and that is where the market will drop dramatically.

A forty percent increase in the interest rate from 5.0% to 7.0% will result in an almost 24.0% increase in the monthly payment. For example, on a $450,000.00, thirty year, fixed rate loan, the monthly payment will increase from approximately 2,500.00 at 5.0% to $3,150.00 at 7.0%. This would reduce the number of available buyers for the property, and eventually the price will come down. Another way of looking at this: the $2,500.00 payment based on a 5.0% thirty year fixed loan that purchased our hypothetical $450,000.00 mortgage, can only fully amortize a $375,000.00 mortgage when the rate is increased to 7.0%. This decline of $75,000.00, is approximately 16% percent when compared to the the 5.0% $450,000.00 mortgage. The question that arrises is: will the value of the house also decline by 16.0%? all things being equal, it may, although I have the feeling that other factors enter the equation at this time. Such factors include the shift in perception by would be buyers that the market will continue to decline in the future, and, of course, the supply of comparable housing in the market and the demand for housing, and the willingness of banks and mortgage companies to continue to make available funds to the housing sector. Only time will tell.

rico delano

January 15, 2006 7:12 PM

Hello, there Peter! Thanks for the article; enlightening read, I must say. You actually had me thinking hard that by the time I picked up Moby-Dick, I forgot where I left off. Yeah, numbers can be very deceiving. Imagine that 0.6 difference translating to hundreds of thousands. Like I've recently began saying, instincts are not always to be trusted. Kindly look up the Monty Hall problem, a rather interesting math problem (or more like a paradox) that will have anyone doubting their instincts. But I digress here.
Thank you, though, for the article, and lets hope that great real estate bubble doesn't burst.

Oh, and by the way, I should probably tell you, an autistic kid taught me that Monty Hall problem. Plus dozens of other things I never paid attention to, but which only a kid was wise enough to take stock in.

Mathias Arithmetica

January 19, 2006 10:47 AM

Javier -

You're ignoring (or wildly underestimating) the very real portion of a residential mortgage that is tax and insurance. Interest rates have, and have had an impact, but it's nothing compared to the impact of "loose" and flexible credit.

mansur lalji

February 7, 2006 9:16 AM

good article however everyone who links intrest rates and housing prices seems to neglect the x factor which is consumer confidence. One of the biggest reasons for the feds to drop intrest rates was to spur the economy and hence employment. we now have a 4.9% unemployment rate which means there are a lot more people who can afford that home at a 7% rate because they are more confident of an income stream.
sure there is a housing bubble and people who are speculating may loose money but the effects of the bubble may be more of a slow hiss rather than a pop.


August 2, 2006 10:10 PM


You are correct when you say that unemployment is low.

But let's see. Economy is slowing??? This means less jobs.

Inflation is climbing. This puts preasure on the FED to increase rates. As interest rates rise, homes become less affordable. As homes becomes less affordable, sales start to slump. As sales start to slump, people in the real estate market start loosing their jobs. And those are alot of people. As those people lose their jobs, economy slows further.

Government should slow spending just about now and we're also too dependent on China.


Ken Flaa

July 4, 2007 8:19 PM

Dear Home Sellers (current and future),

The experts say we have a 6-8 months inventory and we have missed the spring boom we usually see each year. This year houses are actually selling for less then last year at this time - nationwide, and we don't expect to come out if this slump until this time next year. In addition, we have not seen a Buyers market like this since 1990-91


1. Price it Right! Use sites like, etc., or use a local Real Estate Professional. The market is changing monthly and we should be changing with it to keep the Buyers interested!

2. CURB APPEAL! Your home must be at the absolute best! Freshly painted, power washed, landscaped, lawn, etc. To get the buyers inside - start with the outside!

3. BE FLEXIBLE! Buyers know they can negotiate. Just because you are priced right does not mean you will get that price! Be prepared to receive low offers, but instead of rejecting them - counter, negotiate, play the game! You have nothing to lose, but if you say no you just lost your buyer to the next house on the list!

RELATED: "Missteps When Selling Home In Soft Market" by (CBS) The Early Show's resident money maven, Ray Martin at the following web link -

Ken Flaa

April 20, 2010 2:48 PM

I am no longer in business. Please ignore this listing as I did not place it, nor do I know how to have it removed. Thank you. Ken Flaa

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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.

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