by Calculated Risk on 5/06/2008 03:44:00 PM

Inventory numbers from the Census Bureau do not include cancellations - and although cancellation rates are still above normal, the rate has declined from the record levels of last year.

As examples, D.R. Horton reported a cancellation rate of 33% for the most recent quarter, down from 48% in the Fall of 2007. And Centex reported a cancellation rate of 29%, below the mid-30s of 2007.

Each builder has their own downpayment and cancellation policies. Some builders require much higher downpayments and therefore have lower cancellation rates. For Centex, a cancellation rate in the low 20s was normal during good times. For D.R. Horton, a cancellation rate below 20% was common during the boom.

Cancellation rates are important when analyzing the New Home data from the Census Bureau. What matters is the change in cancellation rates, not the absolute level. Falling cancellation rates mean the Census Bureau is probably underestimating sales, and underestimating the decline in inventory.

This graph shows my adjusted inventory estimate using cancellation rates from several of the large public builders. This suggests that inventory levels are now declining. Unfortunately this number can only be calculated on a quarterly basis, and not until several of the homebuilders file their quarterly reports with the SEC.

My inventory estimate is 560 thousand (as opposed the Census Bureau reported 468 thousand) as of the end of March. This is actually positive news, since the inventory level decreased by 42 thousand in Q1 by this method. This also suggests the Census Bureau understated sales slightly in Q1.

Also note that most condominiums are not included in new home inventory (or new home sales) from the Census Bureau. Areas with significant condominium developments probably have higher levels of inventory.