Although painful for homeowners and the economy as a whole, the pullback in home building and the dramatic drop in real estate prices are helping to bring the housing market back into balance. That's a key take-away from the Commerce Department's new-home sales report for August, which was released Friday. Although new-home sales increased by a weaker-than-expected 1 percent from the previous month, the report showed that the backlog of unsold new homes has fallen dramatically.
Here are five things you need to know about the report:
1. Inventory Drop: The Commerce Department reported that the new-home market has a 7.3-month supply of unsold homes at the current sales rate. That's down from 7.5 months in July and 10.9 months a year earlier. With just over seven months of supply, the inventory is "almost at the point where prices can be expected to be broadly stable," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report. Mike Larson of Weiss Research noted that the country now has the fewest new homes on the market since the fall of 1992. "That month was a tie, by the way," Larson said in a report. "We haven't seen a lower reading since Ronald Reagan's first term as president."
2. Price reduction: What's behind the dwindling inventory? Falling prices have played a key role. While awful for homeowners, cheaper prices work to draw more buyers into the market, helping to absorb the overhang of unsold homes that puts downward pressure on real estate values. Median new-home prices dropped by nearly 12 percent, to $195,200, in August from a year earlier. "That leaves new homes at the cheapest level in almost six years," Larson said.
3. Builder cutback: The falling inventory also reflects a dramatic drop in the number of new homes that builders are bringing onto the market. After peaking at an annualized rate of about 1.8 million in January of 2006, single-family housing starts plunged to an all-time low of 357,000 in January of 2009. Fewer new homes being constructed, of course, helps reduce the glut of unsold properties on the market.
4. Sales caution: Despite the optimistic developments on the inventory front, Patrick Newport, an economist at IHS Global Insight, expressed concern about the lackluster sales data. "This is the third important housing report pointing to recent weakness in the market for single-family homes," Newport said in a report. "Both single-family housing starts and existing home sales dropped unexpectedly in August—despite the fact that housing prices have dropped so far, that interest rates are near historical lows, and that the tax credit for first time homebuyer's deadline is approaching."
5. Tax credit expiration: As Newport mentioned, the $8,000 tax credit for first-time home buyers is set to expire at the end of November. "After the credit expires, sales, starts, and prices will take a hit," Newport says. "The big unknown is how big this hit will be." Industry trade groups are lobbying Congress to extend the credit. Senate Majority Leader Harry Reid, a Nevada Democrat, has endorsed legislation to push the tax credit's expiration date back six months.