New home inventories much worse than they appear?
Here's a chart showing the supply of new homes for sale on the market from Bloomberg. Today, I want to explain why it might be "wrong" ...
* U.K. builder George Wimpey, which builds homes in five U.S. states, says HALF its U.S. customers canceled home reservations in the second half of this year.
* U.S. builder Hovnanian said more than a third of its home buyers canceled purchase contracts in the company's fourth quarter. That's up from 25% a year earlier.
* Luxury builder Toll Brothers said 585 orders were canceled in its most recent quarter. That equated to a 37% cancellation rate, double the 18% rate in Q3 of fiscal 2006.
What's going on? Traditional buyers are increasingly unable to sell their existing homes in order to move into new homes they contracted for. So they're walking away. Ditto for speculators who snapped up new homes months ago, expecting to be able to close on them and then flip them for big profits. They'd rather lose deposits of $10,000 or $20,000 than close on a home whose value has dropped by $30,000, $50,000 or more.
Now here's where things get interesting: The supply of new homes for sale "officially" shot up 96% from its 2001 low through its July 2007 peak (292,000 in 3/01 vs. 573,000 in 7/06). Since then, supply has officially dropped a bit -- 1.7% to 563,000.
But the Census Bureau's figures don’t include the impact of order cancellations. When you sign a contract to buy a new house, it’s recorded as one sale. The official tally of homes for sale drops by one. But if you walk away from that contract, your property is not added back to the inventory count.
With cancellation rates surging to 30%+ at several major builders, you have to wonder what the TRUE supply level is in the new home market. There's no way to know for sure. But if you were to increase the official count of 563,000 by a conservative 20%, you'd boost supply by almost 113,000 homes. A 30% bump gives you an additional 169,000 homes.