All those months of cutting production and unloading inventory homes may finally be over for home builders, according to an IHS Global Insight online presentation Wednesday on the construction market.

With the supply of new homes dropping from 12.4 months' supply in January to 7.5 months worth in July, economist Nigel Gault said the market is fast reaching the "equilibrium" of new-home supply and demand, where builders maintain between four months to six months worth of inventory.

According to the most recent U.S. Census report, builders had just 271,000 homes on hand in July, when sales hit a seasonally adjusted pace of 433,000 units. (See story.) Meanwhile, builders started single-family homes at a seasonally adjusted level of 479,000 units in August, the most recent data available. (Details.)

That level of construction activity is just not going to be enough as the economy and housing market recovers in 2009 and 2010, according to Gault. "We've cut housing starts well below the level of demand," he said. "As long as demand remains fairly stable, production is going to have to increase--and increase quite sharply--to prevent that level of supply from going too low."

Gault, who is chief U.S. economist at the Lexington, Mass.-based research firm, asserted that will be the case even if home sales remain level. "Even if there is no huge improvement in home sales, starts will have to rise sharply in order to stabilize the months of supply on the market," he said, predicting that starts will increase much more sharply than sales next year.

He acknowledged that the housing market would encounter a "temporary setback" in early 2010 if the first-time home buyer tax credit expires as planned in November, but suggested that new home sales would not stumble as a result. "The path will be smoother for new home sales (in 2010) because we don't think the ... credit has had a major impact there."

The IHS event also featured a session on building material prices. At that event, an economist for the group said that if an increase in residential construction bears fruit, an increase in the prices of building materials might be on the horizon. But she also said you shouldn't expect cement, lumber, and steel prices to skyrocket. (Story)

Alison Rice is senior editor, online, at BUILDER magazine.