NEW HOMES FOR SALE HIT ANOTHER all-time high in May, reaching 555,000, according to the U.S. Census Bureau. That figure isn't creating panic, though; less than a quarter of those homes were complete, and thanks to the still-solid sales pace, it represents only a 5.5-month supply nationwide.

But taken in the context of an overall slower housing market, it's an indicator that needs watching. Inventories of existing homes also have risen rapidly, leading to a supply overhang in some markets that stretches beyond the five-month mark. According to investment bank Raymond James and Associates, the Washington market's supply reached 7.1 months in July, up from 1.6 months a year earlier; in Phoenix, inventory levels climbed 290 percent during the same period. Inventory “appears more challenging than during the late 1980s,” the bank's analysts wrote.

Two views of inventory data tell different stories about the current slowdown, says Thomas Lawler, an industry consultant. “You can view inventory relative to sales, which is fine if sales stay high, or you can look at it as a percent of the housing stock,” he says. “If you view it relative to sales, we're going back to where we were in the mid-'90s. If you view it relative to the existing stock, it's getting closer to the late '80s or early '90s.”

Robert Curran, an analyst with Fitch Ratings, takes the inventory-sales ratio point of view. “I don't think we're at a danger point,” he says. “I would be concerned, clearly, if the total size of inventory continued to increase and the sales rate declined.”

David Seiders, the NAHB's chief economist, points out that the Census figures lack a key component: Homes that are sold and cancelled are not added back into the bureau's inventory. That piece usually isn't worrisome, he says, but increasing cancellation rates mean new-home inventories are potentially much higher than the official Census report—though without a national estimate of cancellations, it's difficult to be sure by how much.

Each of the observers closely watches cancellation rates, which have risen beyond 35 percent for some public builders in recent quarters. Speculators, who builders believe have largely left the market, accounted for many of those cancellations (though their purchased homes account for a large share of the existing-home inventory). “The question in my mind will be the third or fourth quarters,” Curran says, explaining that cancellation rates then “will be more indicative of current customers getting cold feet or being lured away by competitors.”

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