This rebound in housing stocks makes about as much sense as yesterday’s late-day swing in the market.
Still, here’s the yin and yang of it:
The yin: The always-thoughtful Tony Crescenzi of Miller Tabak, in a note this morning, says that the slide in new home inventory “is still more than 1.5 million above normal, but improvements are occurring. The inventory figure is foremost in terms of what is next for prices.”
He further points out: “The amount of new dwellings needed each year is roughly 1.1 million or 1.2 million because of increases in household formation related to population growth. This means that the amount of new construction is running about 400k to 500k below the level of household formation, an amount that will take a significant bite out of the level of excess inventories. It is a basic fact of life that people need shelter, so it is important to track the amount of new dwellings built versus the levels of household formation. There is inevitability to what will eventually occur, unless of course people return to living in caves, so the only question is that of timing.”
Which gets to the yang: Tony’s note arrived when I was on the phone with a real estate investor I know. We were talking housing stocks. He was saying: “The last census report showed that around 84% of people with above median salaries already own a home. So who is going to buy one?”
Says I: “Move up buyers?”
He: “Move up buyers will also be move up sellers and right now they’re not going to sell.”
Herb’s Hook: They’re not going to sell, at least not at current prices unless they are motivated by any number of reasons, including the reason I would sell right now: To further “short” the housing market and preserve equity. But that’s a dangerous dance, especially with prices nearby not necessarily appealing. I’ve spent the past two weekends sloshing through model homes here in San Diego in price ranges from $600,000 top $1.2 million. (And that’s the low-to-mid end here.) Mantra is, “make us a deal.” Sales reps were handing out “revised” price lists. (They weren’t revised higher!) Incentives were in the tens of thousands of dollars. Inventories are clearly low.
It’s “build to order” at this point at many places. Very few specs being built except to finish projects. There were clearly tire-kickers, but my guess is that many of those were trekking through models as a form of entertainment or to consider their options. The lower the prices, the more traffic — but still nothing like the boom days of a few years ago when builders here were putting your name on a waiting list for the next development. Raising the limit on conforming loans would clearly pry out more buyers and sellers, and help soften the blow. But one thing it won’t do is be the start of a new gold rush into real estate. Over and out.