The housing market continues to show signs of slowing, but very little evidence of the “bursting bubble” that has been predicted for more than three years by some prognosticators. One sign of slowing is the level of unsold new homes.

There are now nearly 200,000 more unsold new homes under construction than there were just five years ago. Rapidly rising sales have masked the surge in construction.

Most analysts focus on the months of new-home supply, which is shown below.

The housing market continues to show signs of slowing, but very little evidence of the “bursting bubble” that has been predicted for more than three years by some prognosticators. One sign of slowing is the level of unsold new homes.

There are now nearly 200,000 more unsold new homes under construction than there were just five years ago. Rapidly rising sales have masked the surge in construction.

Most analysts focus on the months of new-home supply, which is shown below. Since hitting a low of 3.5 months of supply in the summer of 2003, this number has gradually increased to its current value of 4.9 months, its highest value since December 1996.

While 4.9 months of supply is not concerning because the figure remains so low by historical standards, the months of supply calculation is held down by the high level of sales. If sales slow even a little, the months of supply figure will surge, as it did in 1990. The total number of unsold new homes is shown in the purple line below. There were 503,000 unsold new homes in November 2005, compared with 305,000 in November 2000.

With construction at an all-time high, continued strong new-home sales are necessary to keep inventory levels down.

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student.

Here is our current report card:

Economic Growth: C

Economic growth remains solid. More than 2 million new jobs were added over the last year, which is a growth rate of 1.5 percent. In the month of December, 108,000 jobs were created, which is the smallest gain of the year with the exception of September and October, when Hurricane Katrina slowed hiring. The unemployment rate declined slightly to 4.9 percent. Retail sales increased 6.3 percent over the previous year. Inflation remained flat at 2.1 percent, which is still well below its historical average of 4.2 percent.

Leading Indicators: C

The leading indicator index is up 3.4 percent on an annualized basis over the last six months, which is quite encouraging for our outlook for 2006. The spread between the 10-year Treasury index and the Federal Funds rate continues to narrow, reaching 0.21 percent, the smallest spread since March 2001. The stock market finished 2005 essentially where it began, with the Dow Jones losing 1 percent over the year and the NASDAQ, S&P 500 and Wilshire 5000 gaining 1 percent, 3 percent and 5 percent, respectively. The S&P Super Homebuilding Index remained flat during December and has returned 15 percent over the last 12 months.

Mortgage Rates: B+

Fixed rates fell slightly in December, and adjustable rates ticked up slightly. The average fixed mortgage rate fell to 6.22 percent, and the one-year adjustable mortgage rate was 5.15 percent at month’s end. The percentage of loans with an adjustable rate stood at 32.5 percent at year’s end.

Consumer Behavior: C+

Consumer confidence continued to rise in December to 103.6, crossing the 100 mark for the first time since August. Consumer sentiment improved during the month to 91.5, its highest level since July.

Existing-Home Market: B+

The median existing-home price fell slightly in November to $215,000. Annual sales volume decreased to 7 million sales per year, with declines in each region of the country. The inventory of existing homes rose slightly to 5 months. The pending home sales index fell in November, but remains very strong at 120.6.

New-Home Market: B-

Annualized new-home sales fell 11 percent in November to 1.25 million units. However, this follows an 11 percent increase in October. The median new-home price fell to $225,200, and the Housing Market Index fell to 57 in November. The supply of unsold homes increased to 4.9 months.

Housing Supply: B-

Annualized housing starts increased 5 percent to 2.12 million in November, with single-family starts increasing to 1.81 million. Total starts increased 11 percent in the Northeast, 12 percent in the Midwest and 12 percent in the West, and fell 1 percent in the South. Single-family permits increased 0.2 percent to 1.71 million units.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.

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