December new home sales fell 7.3 percent prompting concerns about the impact of new homes on existing inventory.

Declining inventory has helped boost home prices and has been one of the biggest factors aiding the U.S. housing recovery.

Overbuilding has naturally been seen as a potential risk to the housing market.

But Bank of America's Michelle Meyer writes that there are three reasons not to worry about optimistic homebuilders that will overbuild. 

  1. "There are capacity constraints in the market with many homebuilders exiting the market during the crisis."
  2. Small homebuilders have had a hard time obtaining financing for new projects.
  3. Large homebuilders had downsized during the crisis and it will take time for projects to pick up again.

Meyer has previously warned that (overall) inventory tends to build up in the first quarter when the weather is better and before school begins.

"Sellers therefore tend to put their home on the market in anticipation of the spring selling season," she said in an email interview. "This means inventory rises at the beginning of the year and falls through the spring/summer as sales are completed."

SEE ALSO: Optimists Are Ignoring Two Key Points About The U.S. Housing Recovery >

Please follow Money Game on Twitter and Facebook.

See Also: