The inventory of new homes for sale reached a record level in January, with the supply (at the January sales pace) moving above five months for the first time in nearly 10 years, according to the latest Census Bureau figures.

In addition, the median length of time that completed new homes were sitting on the market moved up to 4.5 months. But at least one observer says the trend, though serious, isn't as bad as it seems. Kent Colton, a senior scholar at Harvard University's Joint Center for Housing Studies, says less than one in four of the inventory is actually completed and sitting idle. The rest either haven't been started yet or are still under construction.

Of the unsold houses, he said, only 22 percent are finished, sitting empty and waiting for occupants. Of the remainder, 58 percent are still in the process of being built and 20 percent haven't been started.

"It's a serious problem," he said. "But it's not as dramatic as it looks."

That the Census Bureau's new-home inventory estimates include units that are for sale, but not yet started, "takes some sting" out of the inventory "overhang," the National Association of Home Builders agrees.

But in an electronic message to members last week, NAHB economists pointed out that the inventory of units completed or under construction also is at a record level. Furthermore, they noted, sales that are subsequently cancelled never get back into the government's inventory estimates, "and it's clear that cancellations have been on the rise, too."

In February, NAHB surveyed nearly 500 single-family builders about unsold inventories. Excluding units not-yet-started but including units handed back buy buyers who have changed their minds, more than a third of the respondents said their inventories were higher than six months earlier, while less than one-fifth said their inventories had come down over that period.

But one of five builders also reported that their cancellation rates were higher in January than six months earlier, while only 8 percent said their cancellation rate was down over that period.

In order of importance, the reasons given for the kick-outs were: The buyer could not sell an existing house, the buyer could not qualify for a mortgage, the buyer changed his mind, family circumstances changed, or there had been a change in the buyer's employment. In addition, a supplementary NAHB canvass of about 30 large single-family home builders showed that, in January, cancellation rates (cancellations as a percent of sales backlog) were up by about one-third, on average, from historically low levels of a year earlier.

"That trend, if it continues, accentuates the need for builders to control speculative building during the period ahead and to employ incentives to support sales and limit cancellations," the association's economic department warned.

Colton, meanwhile, believes the new home market is simply moving back to a period of normalcy, even in places like Washington, D.C., where the backlog of unsold units was at 7,000 a year ago but now totals 17,500.

"Clearly there's a softness," he said. "But a year ago, inventories were very, very low."

Colton said that rising inventories are likely to cause a 10 percent decline in housing starts this year, from about 1.7 million in 2005 to 1.543 million in 2006. But even at that, this year will go down as the third strongest year ever in terms of starts, he said. "It's not like the market is dropping to panic levels."

The long-time housing observer, who was executive vice president of NAHB for 10 years before leaving in 1999, doesn't believe the market will fall because it is "supported by solid, overall demographics." Indeed, strong fundamentals and equally strong household growth are likely to fuel the housing market well into the middle of the next decade, he said.

Some 19.9 million new household will likely be formed over the next 10 years. "A rate of 1.9 million a year signifies very strong demand," Colton said.

Though the Harvard scholar expects interest rates to be at or near the 7 percent level by this time next year, he doesn't believe rising rates will be responsible for the slow down. Rather, he said, it will be the inability of buyers to afford ever-rising house prices at any rate.

"As long as long-term mortgage rates remain below 7 percent, we'll be okay," he explained. "But at some point, consumers will no longer be able to keep up with the high level of price appreciation. There has to be some adjustment."

Using the old standard that home buyers can afford a house priced at three times their income. Colton noted that in 1999, the median household income was at or more than three times the median house price in 74 of 110 major metro areas. By 2004, however, the ratio had fallen from 67 percent to 39 percent, or just 43 of the 110 markets.

"Clearly, affordability is the major issue," he said. "House prices have catapulted ahead of incomes in many metro areas."