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Housing Data: Economics 101

New Home Sales rose by 2.4% last month while June numbers were revised downward. While there are many factors to consider, the results continue to be a real life lesson of basic economics and the rules of supply and demand. Looking at the long term trends, don't expect changes overnight.

Any introductory econ class will teach that as long as there is money to be made, suppliers (in our case, builders) will continue to join the market and add supply. As supply increases above the natural demand, inventory will build and margins will shrink. Suppliers, ultimately, will need to cut price so they can sell off their inventory and bring supply levels back to an equilibrium with demand. The charts below show how demand and new home sales increased from 2001 through 2005. Supply, however, kept climbing which ultimately helped lead us to the situation we are in today.

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New Home Sales (10-yr chart) are way down...

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… driven in part by oversupply...

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...And bringing prices down

Of course there are other factors that have had an impact including the credit crunch, lending practices, the economy, etc. But the basic economic principles still hold. As a result, home builders like Pulte Homes , KB Home , Lennar, and Hovnanian have been hit hard. The rules apply on a regional level too and some markets are beginning to show signs of a bottom as prices have reached a level that buyers are coming back and working down the inventory.

Comments? Send them to bythenumbers@cnbc.com

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