Working Off Excess Housing Inventory

We are working off the excess housing inventory that we developed during the housing boom.

This decline came despite a drop in new home sales; even after the drop, though, sales were higher than new construction (keep in mind that the data have some significant deficiencies; take this as medium fidelity, not high fi).

But put this data into a longer term perspective:

That horizontal line is the long-run average. So far we've closed the gap from the peak of the housing inventory by 45 percent. At the current pace by which the inventory is being worked off, we'll be back to an average inventory in 21 months, or roughly at the end of 2009.

Homebuilders, here's your new theme: 2010, gets better then.

Comments

[mark r]

I do not believe a word of your post on housing inventory...What is ailing the housing market and inventories is more complicated than you think...the housing problem is just one small aspect of a sinking American economy...Bet we are still is deep sh-t in 2010. This is not going away so easy or so fast.

[Tom in MN]

Though the situation can be involved, there are 2 important issues we need to rememeber. The number of households is increasing every year so the demand for houses will continue to rise. Currently there are a number of potential buyers sitting on the sidelines waiting for the "bottom" before jumping in, but they will eventually jump in. The demand for housing may have temporarily subsided, creating a glut, but it hasn't abated. Also, those that are losing their home thru foreclosure will still need a place to live and will become renters...from somebody. Secondly, every material and commodity used in building new homes, including labor, has gone up. In addition, farmers are now making a profit from farming their land so they will charge more to developers to sell that land for new housing. Once the "glut" of new homes has dissipated, builders will refuse to bring any new homes to market until they can make a profit in doing so, therefore the replacement cost of new housing will increase to profitable levels....and ultimately, the cost of used housing is influenced by the cost of new housing. Our free market society and the laws of supply and demand will drive the housing market if we can get thru this temporary crisis; and solve the problems of the people who need, and want, to refinance their homes but cannot get the appraisal values to justify the loan amounts they need. Maybe if the government would guarentee the mortgage companies the difference between the appraisal value and the refinance value, people could afford to refiance and would want to avoid foreclosure. Then everyone is a winner.

["Magazine-Cover-Indicator" Indicator....]

Tom in MN -- "Then everyone is a winner."

....everyone except....taxpayers who do not already own a home, and first time home buyers.

For there to be "winners" it implies there will be "losers". I don't like you "winning" by taking money out of my pocket, or my young friend's pocket, or my kids' pockets.

[johngonole]

Tom, you made some good points about replacement cost. I think really long long term they will help prop up existing home prices but not in the short term. In the short term home builders will be pinched by the supply glut forcing sales prices downward. At the same time the high cost of building will further squeeze their profits. Since most homebuilder have their balance sheets completely tied up in land and homes under construction they must continue to build to meet the fixed overhead cost. The combination of high const cost and low sales will eventually put some of these homebuilders out of business. So over time the housing inventory will be reduced, there will be less in the the homebuiding business, and prices for houses will firm up.

In the near term a houses selling price is a function of supply and demand. Input cost into building a home can not be passed through in a buyers market. In a sellers market yes.

Look at the gas refiners as an example. They are squeezed by gas prices that refuse to rise faster than the cost of the oil input. They are making like zero money right now refining oil. A while back when gasoline had shortage gas prices went up while oil was actually going down or staying flat.

That is one reason why government taxes on output product etc...can be so devestating. The final produce price is dictated by supply and demand for the product not the input costs. In the long term the market will balance the two and things such as taxes are passed along to the customer but it usually takes a while for the market to adjust to the new cost. First prices hold steady, then profit drops, then output slowsdown, then shortage, then prices rise and now the input tax cost is built in permanently.

later,

John

[zuzu'spetals]

Dumb question: if we now artificially create a "floor" under current home prices-- while knowing full well that existing prices are still bubble prices that were and still are unsustainably high-- then WHO is gonna buy all these still-overpriced houses as they come on the market?

How can the glut of housing inventory possibly come down, when with the new tightened loan standards, so many fewer people are able to get loans?

In my area (the Virginia Beach/Norfolk MSA) median home sales prices actually INCREASED in 2007, largely because sellers were adding 4% closing cost assistance into their list prices, just to get the home sold! With the 6% realtor commission also "priced in" to the ask price, this is a 10% artificial inflation of the sales price that is then reported, after closing, to the local tax assessors office. (Realtor commissions and seller-paid incentives should be subtracted from the sales price number sent to the assessor's office, but they are not) This 10% artificial price inflation then skews the tax data for all following appraisals. Even as the total number of sales drop, the sales price on paper keeps getting higher.