Home sales: Is the market glutted?
January report shows 5% drop in new home sales from December,
building boom has resulted in 20% more new homes on the market than
a year earlier; new homes are taking longer to sell.
By Chris Isidore, CNNMoney.com senior writer
February 27, 2006: 2:38 PM EST
NEW YORK (CNNMoney.com) - The pace of new home sales slowed in
January, according to a government report Monday that included the
latest sign of a growing glut of new homes on the market in some
areas.
The Census Bureau reported that new homes sold at an annual rate of
1.23 million homes in the month, compared with the revised 1.3
million home pace in December. Economists surveyed by Briefing.com
had forecast that January new home sales would remain little changed
at the 1.27 million pace originally reported in December.
The report showed there was a 5.2 month supply of new homes on the
market in January at the current pace of sales, as the number of new
homes available to be sold rose to 528,000. That's up 2.5 percent
from December and up 20 percent from the number of homes available
in January 2005.
The report marked the first time the supply of new homes crossed the
five-month mark since November 1996, according to historical data
from the bureau. The market had an average of a 4.5 month supply of
home on the market throughout 2005.
David Seiders, chief economist for the National Association of Home
Builders, said it is too soon to say there is a glut of new homes on
the market. But he said the latest report does confirm other
readings that show a softer market for new home sales than seen
during the record pace set last year, when a total of 1.29 million
new homes were sold.
"There's been a definite upswing in the inventory level for some
time," said Seiders. "The months supply was held steady by a pretty
strong sales pace. The big reason for the big uptick in months
supply is the slowing sales pace."
Seiders said there's no real correlation or effect on new home sales
and the weather, but the warmest January weather in history could
also have fed into the increase in months supply because the Census
Bureau considers homes that are permitted or recently started as
part of the available inventory. The warm weather prompted much
stronger-than-expected starts and permits.
But even the report's figure on median time it took for completed
homes to be sold rose to 4.5 months from a median of 4 months
throughout 2005, a number that wasn't affected by the warm January
weather.
Home builders have reported an increased number of orders for new
homes being cancelled in recent months, raising concerns that buyers
who were looking to real estate for an investment rather than their
own housing needs are pulling out of the market. Such cancellations
could put downward pressure on prices in some formerly hot markets.
Home builder Toll Brothers (Research) warned last week that it is
seeing greater supply than demand of new homes in a number of
markets, and it pointed to the drop in interest by investor-buyers.
"Speculative demand has ceased and speculators are now putting their
homes back on the market. The result has been more supply than
demand in some regions," said the company's earnings
statement. "Markets such as metro Washington, D.C., which are sound
economically and showing healthy job growth, will need to work
through their excess supply before the imbalance once again tips in
our favor."
Still, the pricing information included in the report showed little
weakness.
The median home price, the price at which half the homes sold for
more and half sold for less, was $238,100, unchanged from the median
price for all of 2005 and up 4 percent from the December reading.
The January median is also up nearly 7 percent from the year-earlier
level, although it has slipped a bit more than 2 percent from the
record $243,900 reached in October.
But the strong prices could only continue to feed the oversupply of
houses that seems to be developing, and could lead to a larger
correction in the market in the future, said Dean Baker, co-director
of the Center for Economic and Policy Research and a long-time
advocate of the theory that the current housing market represents a
so-called "bubble" that could see a broad decline in prices in the
future.
"Builders will keep building as long as they can keep getting these
prices," said Baker. "But I think there's a glut developing clearly
in some markets and that clearly will put downward pressure on
prices."
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