High New Home Sales Inventory: What it Means for Home Building

Housing economists generally recommend that a balanced market inventory equates to a supply lasting five to six months. This measure indicates how long it would take for the current inventory of homes to sell at the present monthly sales rate.

According to the NAHB, inventory larger than a five- to six-month supply would suggest weaker or declining home price growth and home building activity. Lean inventory levels (less than a five- to six-month supply) tend to lead to price growth and gains for home building activity.

In the Census May 2024 newly built home sales data, the current months’ supply of inventory is 9.3. Some analysts have noted that, given the five- to six-month benchmark, that this means the building market for single-family homes is possibly oversupplied, implying declines for construction and prices lie ahead.

However, this narrow reading of the industry misses the mark. First, it is worth noting that new home inventory comprises homes completed and ready to occupy, homes currently under construction and homes that have not begun construction. That is, new home inventory is a measure of homes available for sale, rather than homes ready to occupy. In fact, just 21% of new home inventory in May comprised standing inventory or homes that have completed construction (99,000 homes).

Read More