The demand for single-family homes and condo units peaked during the second half of last year and has moved downward since then. This change of direction has occurred as record-high house prices and rising mortgage rates have taken a heavy toll on affordability. Eroding expectations of future house price appreciation may also be contributing to the erosion of demand, particularly among investors/speculators.
On the supply side, we see that total housing starts averaged 2.21 million units (annual rate) for the January-February period, higher than any quarterly average for the entire expansion period, and the same can be said for the single-family component which averaged 1.82 million for the first two months of this year. The strong forward momentum of housing starts kept residential construction put-in-place on a strong upward trend through February, particularly for new single-family units.
Maintenance of strong production in the face of eroding final demand for homes has resulted in record levels of unsold new-home inventories and a large increase in the months’ supply--from 4.1 last July to 6.3 in February. Furthermore, these inventories don’t include homes handed back to builders when sales contracts are cancelled!
Our surveys show that builders are well aware of the downshift in housing demand as well as the recent upshift in cancellations, and many builders are offering special incentives to maintain sales volume and limit cancellations. At this point, I’m attributing the overly exuberant housing starts of early 2006 largely to unseasonably good weather, and I expect the starts pace to fall back in the near future. Having said that, it’s clear that many larger builders have large backlogs of home sold but not yet started (largely because of land-use and regulatory delays) and I expect starts to hold up better than new sales in 2006.