People Are Buying Houses Again

Welcome to Econforecaster.com!

I am offering on this site commentary, insights and opinions on economic and business news through my Insights Premium Blog as well as comprehensive analysis and forecasts in my quarterly Outlook Newsletter.

Not ready to become a member? Subscribe to my free blog previews by email or RSS - no strings attached!

Regards
- Jim

Sure new home sales are 20 percent below a year ago nationally – they should be. There was definitely an overbuilding mania, leaving us with millions of houses, condos and apartments that nobody wanted. It was too late to stop building to avoid the financial disaster that overtook us with too many unqualified buyers and too many speculators commissioning the construction of new homes. The price we have paid has been huge.

The dot-com boom gave us worthless stocks. We could just burn ‘em, nothing left but the losses. Worthless houses? Losses again. Unlike the dot-com stocks, they just hang around, depressing prices and new construction and blowing up so-called “assets” based on the mortgages that financed them. Maybe we should burn ‘em.

But that was then. Now, things are starting to improve as we knew they would. With a million new family formations each year, we will eventually catch up with the excess supply. Existing home sales were up almost 4 percent in June and this time it’s not speculators. And new home sales–these are homes built in the boom that have been sitting around–were up 11 percent, one of the largest increases in recent history. The inventory of new homes is at a record low level. Still, foreclosures in California are larger than the increase in sales nationally, indicating that there will be markets such as California and Florida that will have lingering problems with excess supply and falling prices. Unfortunately, unlike stocks, we can’t move the houses to where they are demanded. There is no NYSE for houses.

The final piece of good news is that the Case-Shiller home price index actually rose in 15 of 20 major markets. More houses are selling and at higher prices, which is a clear sign that housing markets are healing, that inventories are under control in most markets and that new home construction will pick up more steam. That will help everyone.

Housing Recovery Begins, But…

In May, pending home sales posted their largest gain in 7 years, up 6.7% (and positive gains three months in a row). June was a little lower, but still positive. Of course, large percentage gains are easier when the denominator is small, but this is still good news, in part because these people are not “flippers”, speculators hoping to flip their agreement at a huge profit before settlement. With “flippees” non-existent, these are meaningful buyers.

Housing starts are still very low. In 2006, we built new houses and condos and rental units at a two million plus annual rate (well in excess of what demographics would support). Speculation on housing replaced the “dot com” insanity, even though it had to be very clear to even the casual observer that we were collectively building units far ahead of basic demand. The outcome was unavoidable and should have been clear to all, especially the big builders who collect market intelligence. When supply dramatically exceeds demand, prices must fall to reduce inventory and will fall until supply and demand are in balance, whatever it takes.

The problem is that even at a very low price, most people have no need for a second home (and don’t want the cash flow obligations attached). Perhaps a new breed of speculator is emerging, especially in the condo market–investors with cash and the patience to wait for demographics to catch up with supply. Blocks of condos in big projects are being sold off by initial financers and investors at bargain prices. Buyers with the best credit can’t get a mortgage to buy a new condo in a project that is only 20 percent sold out – the risk of project failure is too high.

Everybody is living somewhere, renter or owner. So motivating them to move may generate fee income, but doesn’t exhaust the stock of excess residences available. Only (1) throwing the kids out, (2) more demand for second homes, or (3) population growth and family formation will solve this problem. Many who would be OK home owners were sold a house that was too expensive with a mortgage with terms too good to be true (and they were). These “foreclosed” individuals will take years to become home owners again.

So, progress is being made. But residential construction, normally about 5 percent of GDP, is down to 2.8 percent. Expenditures are down almost $300 billion since 2005. The problem is being resolved, but slowly (since demographics improve slowly). In heavily overbuilt markets, prices aren’t done falling yet, but likely to slow as those who can’t “hang on” are mostly flushed out into the pool of foreclosures (and sales are growing in those heavily overbuilt markets).

Could the Beleaguered Housing Sector Finally Be Turning Up?

Nothing would change the overwhelmingly pervasive gloom and doom among economic forecasters, investors and policymakers more than convincing evidence that residential investment had finally hit bottom and begun to add to GDP growth for the first time since the fourth quarter of 2005. That would be wonderful news indeed.

We have seen the first sign of that highly anticipated event in the March 17 Census Bureau release on housing starts in February 2009. That report surprised all of us by showing that total privately owned housing starts that month were running at a seasonally adjusted annual rate of 583,000 units. Click here to read the full post and comment (Insights subscribers) »