Home Inventory Plummets, Pushing Prices Higher

New Home Supply October 2009The supply of newly-built homes fell to its lowest levels since 2006, offering additional proof of a housing market in recovery.

Home supply is defined as the amount of time it would take to sell the current inventory of homes at the current pace of sales.

In October, for the 8th consecutive month, home supplies fell. Since peaking in January 2009, it's now down by almost half.

Lower supply leads to higher prices.  This is Economics 101.

Furthermore, supply is expected fall into 2010. According to the government, builders are breaking ground on new homes at a declining pace, even as sales ramp up.

Builders are cheering the October New Home Sales report, but its the everyday sellers of "existing homes" that have real reason to celebrate.

See, as builders clear out their respective inventories and turn profitable, there's less reason for them to offer the types of over-the-top purchase incentives that characterized the last 12 months of selling. 

With fewer builder incentives, the playing field levels between large corporations and individual home sellers.

And while this is happening, buyers are eagerly taking advantage of low mortgage rates and federal tax credits for buying homes.  It's pressuring home prices higher overall.

Since January 2009, the average sale price of a newly-built home is up 6 percent.

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