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.
