In response, builders naturally began to reduce new construction. Part of this pullback was motivated by skittish households; cancellation rates, according to some large builders, reached 40 percent or more during the latter part of 2006. Although the majority of forecasters correctly anticipated softness in housing construction, the magnitude of the decline exceeded their expectations...

A special word of caution is in order concerning housing data... To an unusual degree, sales data are affected by cancellations, which occur when buyers walk away from sales contracts. In published data, cancelled sales are not subtracted from new sales to create a net sales series. Moreover, cancelled sales are not put back into the data on the inventory of unsold new homes. Anecdotal reports clearly indicate that cancellations have been material. Thus, official data overstate net sales of new homes and understate the inventory of unsold homes. Finally, favorable recent news on the inventory of existing homes for sale may well have been influenced by discouraged homeowners taking their properties off the market rather than by actual sales.