New home sales increased in November over slight upward revisions to the August through October readings. This totals a cumulative 46,000, and brings the latest figure to an annualized pace of 1.047 million units. New home sales have gone above a one million unit pace for four consecutive months. This is after dropping to 979,000 in July. RBS Greenwich Capital economists said that it is seeming more and more that the July print could be the low for the cycle.

"We have been very hesitant to "call" a bottom for home sales, and we would still be pretty cautious, but it does feel more and more as if housing demand is stabilizing," said RBS Greenwich Chief Economist Stephen Stanley.

He added that the inventory data actually also looks encouraging. The number of homes for sale and the months' supply peaked in July, he pointed out, which coincides with the low point in sales. The stockpile has been limited in the last four months by 28,000 units, or around 5%, and with sales rising, the months' supply has fallen to 6.3, within striking distance of the six-month mark that is mostly seen as a sign of a balanced market.

Stanley said that there are two reasons why the inventory situation is likely not as benign as these inventory data would suggest. The first is that cancellations do not re-enter the inventory stockpile in these data. Thus the absolute level of unsold stocks is considerably more than reported, considering the unusually high cancellation rates that builders have noted.

The second reason RBS' Stanley pointed out is that the pullback in inventories is still limited to the early stages of the supply pipeline. When broken down by stage of processing, inventories of homes that have not yet been started was steady in November and has decreased almost 20% from its high seen in June. Also, the inventory of unsold homes under construction dropped in November for the fourth consecutive month and has now dipped about 12% from its high in May.


By contrast, Stanley said that the inventory of completed homes for sale increased in November for the sixth consecutive month, is at its cycle high, and is up over 30% in the past six months. This is all consistent with the path of housing starts, Stanley stated.


"Starts have gotten down to an appropriate level but were excessive until a few months ago," he said. "Since it takes six months to build a home, the pace of completions is still too high and probably will be for another few months." He added that their best guess is that these completed inventories will peak out in early 2007, once starts have been sufficiently restrained for an entire six-month period, and then it will take much of next year for builders to actually work their inventories back down to the desired levels, RBS' Stanley stated.

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