The Commerce Department reported preliminary data on December new home sales this morning. Economists had been expecting a decline of 2% from the 464,000 rate initially reported for November. Instead, the December number came in at 414,000, a decline of 7% from a revised November rate of 445,000.

The initial reaction from analysts and journalists was that this was affirming the view that the housing market weakened in the fourth quarter, presumably from higher mortgage rates and a colder than normal December. While published mortgage rates were indeed higher in December (average 30 year rate was 24 BP higher than average in November), rates were still within the same range that fixed rates had been in since the end of June.

I would propose that we did have a softening of sales (new home contracts), but the softening was a result of an expected seasonal decline in traffic and from very limited inventories of new homes available for purchase. Within the Commerce Department report it was noted that the inventory of new homes available for sale at the end of December was 171,000, representing 5 months of supply. There are only a few times in recorded history that the months of supply calculation has been lower. Excluding this year, there has never been a time when the months of supply was this low and the number of finished units available for sale was under 200,000.

We’re wrapping up our field collected inventory data (look for a note to be published next week), but here are some details from what we are seeing in traffic and sales reported by production builders.

Traffic was up 1.3% in December over last year but down 27.5% over November. Traffic for the full year was up over last year by 31%. There has been a seasonal month-over-month decline since October, but that is normally true each year. What we are seeing in traffic is consistent with prior cycles while still remaining above averages for 2012 and 2013. Conclusion—consumers are still interested in new homes.

It is in new contracts where we see some softening that is more than seasonal. The new contract average per community was down 23% over December last year (last year was not a typical seasonal number for contracts), and was down 16% over November. The brighter note was that conversion rates improved in December.

As is typically the case with housing, we see great variation in trends at the local level with some markets seeing increasing traffic in December. Leading the way was Tooele County, UT, which had an almost 200% increase in traffic over November. Other markets with significant increases in traffic include Calvert, MD, Southern Arizona, Spotsylvania, VA, and Imperial Valley, CA.

On the contracts side, Broomfield, CO reported an increase in contracts over November of more than 200%. Imperial Valley, CA, Calvert, MD, Denver, CO, and Stafford, VA also showed significant month-over-month gains in the average number of new contracts reported.

In looking at weekly numbers, the first three weeks of January are climbing up from December’s low in 2013 for both traffic and contracts. This shows a continuation of the momentum seen at the end of 2013 for traffic with the most recent week in January up 4% over the prior and a shift in the trend for contracts as the latest weekly average rose 12%.

In conclusion, we are starting 2014 on the right note. Builders remain positive about future prospects, and they are starting homes at a higher pace than we have seen in years. This will provide much-needed inventory to compete more effectively with existing homes, which are also limited in supply. More supply should limit significant price gains but should also more readily support stronger new home sales throughout 2014. We will keep an eye on consumer confidence, plans to purchase, and weekly data on traffic and sales, but at this point, it looks like 2014 will enter the spring selling season on strong footing.

Learn more about markets featured in this article: Denver, CO.