by Calculated Risk on 4/10/2006 10:23:00 PM

Caroline Baum writes for Bloomberg: Economy Springs Ahead, May Fall Back

...the gap in the housing market between demand (sales) and production (starts). ...If demand slows and production doesn't, inventories pile up. Unless builders want to run their business into the ground, they build fewer houses.

Something's Gotta Give

The difference between new home sales and single-family starts has reached extremes seen only a handful of times, according to Joe Carson, director of global economic research at Alliance Bernstein. In all three previous instances -- 1972, 1978 and 1984 -- starts took a tumble.

The article has some positive quotes from Michael Carliner at the National Association of Home Builders:

Carliner says the bulging inventory of unsold homes -- up 23 percent in the past year to 548,000 -- isn't as burdensome as it looks. "Excluding homes that haven't been started, the months' supply is historically low," he says.

However, "there are things that we don't measure that are worrisome," Carliner says, referring to sales cancellations. "Cancellations appear to be up," based on net sales numbers reported by large builders.

If housing starts don't begin to decline soon, there will be a problem of too much inventory, he says.

Lets check Carliner's claim that "excluding homes that haven't been started, the months' supply is historically low":


Click on graph for larger image.

The Census bureau is the source of all data. Note that the For Sale data by stage of construction is NSA - that makes a small difference.

There is nothing unusual about the number of houses For Sale, Not Started. In fact, both measures of supply are at highs since the end of the last housing bust. When comparing to the late '80s and early '90s, the months of supply is low - by both measures. But Carliner's argument concerning Not Started houses in inventory falls flat.