The nearly always-on-the-mark Bloomberg News columnist Caroline Baum reminds investors/traders -- and potential home buyers -- that one should not jump into summer by jumping into a home purchase (if you can avoid it).
Baum notes that one has to view April's 6.3% increase in existing home sales in the proper context: housing has been down so much and for so long that every incremental pop up looks like a housing sector recovery. It isn't.
New and existing home sales peaked in July 2005 and September 2005, respectively, but housing starts didn't until January 2006. The result? A massive inventory build.
A record housing recession
Single-family starts are down 63% from their January 2006 peak, easily 'topping' peak-to-trough declines of 38% in 1973-75, and 57% in 1984-1991, and approaching the 65% slide in the housing recession of 1977-1981, Baum says.
Further, homebuilders are lobbying Congress for a tax credit for first-time homebuyers, Baum added, but are hesitant to do the one thing that has historically sparked buyer demand in a hurry: lower prices. Builders are hesitant to lower prices for fear that they'll alienate previous customers and encourage current buyers to seek to renegotiate contracts, Baum said. But ultimately, that's what's need to get home sales headed in the right direction.
Housing Analysis: Baum's point about the need for builders to lower prices of new homes is valid. Even so, the inventory of new and existing homes is so large, (a 10-11 month supply at current sales rates), that more action is needed, including a federal tax credit for first-time homebuyers, a credit that should be double for any member of the U.S. Armed Forces serving, or who has served, in the Iraq War. The tax credit, combined with the new, higher Office of Federal Housing Enterprise Oversight conforming loan ceiling, $729,750 or 125% of the average home price in a metropolitan area) will not, in and of themselves, create a housing boom, but they will get the housing ball rolling in the right direction.
Baum: Stagnant housing sector needs drastic action ... such as lowered prices
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Reader Comments (Page 1 of 1)
6-18-2008 @ 9:00PM
william lindblad said...
She is part right. On the part of the builders and lowering prices there remains a small problem which is known as profit. The builders merrily bought into the luxury concept - and that is what they built. There is little room to play when the initial investment was based on this mentality. They have a problem and so do the banks that provided the capital. Further compounding this mess is that the builders continued to build, even after they saw the slide coming. Some have made adjustments if they were fortunate enough to have time to change project plans and build at lower price levels. All in all, there is a glut, but it is in price ranges that are far too high. The fly in the ointment will be the older homes that escalated in value but had a price basis that was much lower. These owners have a lot more room to lower price and that in itself, will result in lower prices. People die and houses go to estate and in this economic environment the heirs are going to lower price and sell. Real estate agents are going to get accomodating as commissions are as short as sales. Besides, I agree with the RBS assessment that the market is in for a deep correction and if so, this will make believers out of even the most devout optimist. Cramer take note. It's coming.
6-19-2008 @ 1:21AM
Pat Kenmir said...
VERY few people can afford a $ 700,000.00 to $ 500,000.00 house today. These over priced homes are simply not affordable anymore. Many of these homes were selling for $ 150,000.00 to $ 200,000.00 in 2000. After these home tripled in value in 6 years, the bottom fell out of the housing market and these homes are no longer worth the prices people are asking. ALL HOMES ARE DEPRECIATING AT THIS TIME AND WILL CONTINUE TO DEPRECIATE FOR THE NEXT 3 TO 5 YEARS UNTIL PRICES BECOME "REASONABLE" AGAIN ! Are you going to buy a $ 300,000.00 home that will only be worth $ 200,000.00 in 2 years? Real affordable home prices are NOT here yet.
6-19-2008 @ 7:30AM
al coholic said...
Why do builders continue to start houses when they have so much inventory? It's a viscious circle. They use the draws from the new houses to pay the subs for the work on previous houses and make interest payments to lenders.
Eventually the lender calls the builder and tells him he cannot start any new houses until he sells a few. That's when a lot of builders fold. The lenders wait too long to pull the plug because they know when they do it will be the end of their interest income too.
When inventory finally gets low after a couple of years of glut, a totally new batch of carpenters and speculators become builders to accomodate the demand and the cycle starts all over again with new faces.