The plunge in new home sales in February caught the attention of many reporters and housing analysts. The 250,000 annual rate of sales reported for the month is by far the lowest on record and is down by more than 80 percent from levels reported in 2005 near the peak of the bubbles. The decline in new home sales have been even more severe in the West and Midwest, where they are down by 87 and 88 percent, respectively from their bubble peaks.
While these declines are dramatic, they are not unexpected. The bubble prompted an enormous building boom, which led to a massive over-supply of housing. A major part of the correction process must be a sharp reduction in the homes being built each year, which we have seen. The February number for starts of single-family units was down almost 80 percent from the peak of the boom. After a period of weak construction, supply and demand will eventually come back into balance.
For more, read our latest Housing Market Monitor.