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Credit: Wells Fargo Securities  “The Construction Paper” April 10, 2013


In July 2006, when the housing market still seemed to be--with the emphasis on seemed to be--booming, there were 572,000 unsold new homes in inventory, a record number. At that point, most builders were still pretty confident and still building.

As it turns out, they should've been pretty worried.Those 572,000 units represented a 7.3 month supply of unsold units, a unhealthy number and up from 4.2 months a year earlier. By January 2009 all those unsold units had come to represent a 14.3 month hangover, a sorry record and the full-blown effect of over-building.

In response builders stopped building. Housing starts hit bottom at 408,000 units (another dismal record) in April 2009.

But it turns out that there's now evidence that that bad tasting medicine the housing industry swallowed for many, many months (starts finally exceeded 1,000,000 units just last month) really did the trick. In March of this year there were only about 150,000 new unsold homes in inventory (see chart), a 4.4 month supply, which is down 64% from the 2009 peak. At the same time the pace of new home sales is up 18% year-over-year and prices are up 3%. All of which suggests that at long last supply and demand are finally where they both should be--in equilibrium.