Monday, August 2, 2010

The Housing Bubble Continues

I suspect many areas of the country have not seen the lows in housing prices. As with other goods and services, in the long term housing prices are subject to the laws of supply and demand. Right now there is lots of supply and not much demand, which implies a future decrease in prices.

Available housing is still overabundant, with a 10+ month supply, and it will continue to worsen. In a few cities, like Detroit, there is an oversupply that will not be matched by demand because of migration from the area. In most places, the oversupply can eventually clear, either through price declines or increases in demand.

Let’s look at both sides of the supply/demand curve starting with the demand for housing:

Interest rates are at generational lows, which means mortgage costs are relatively low. That’s already priced into the current market, so unless interest rates decline further, this will not increase demand.

The US population continues to grow and form additional family units. Eventually this will require additional housing. However, many families have substantial elasticity on when a new household is formed. Children return to parental homes after college; roommates rent together for longer periods before taking separate residences. Parents go and live with their children. Over the long term, this will boost demand for housing, but the long term can, and I think will be, several years out.

The ill-conceived $8,000 tax credit for new homebuyers frontloaded demand. Any first-time home buyer who was close to being ready to buy a house had an $8,000 incentive to close the deal before the end of June. People who might have bought houses later in the year, or even in the first few months of next year, accelerated their plans to make an earlier purchase. The credit was ill-conceived because it did not change demand a whit; it only moved it forward and rewarded one lucky class of home buyers at the expense of future taxpayers (not at the expense of current taxpayers since no taxes were raised to pay for the largess).

Job growth is paltry, and wage growth for those employed is also low.

Turning now to the supply for housing:

Foreclosures continue and are starting to include those who negotiated revised terms with their banks.

The percentage of homeownership for the 75+ age cohort has increased since the housing bust. This suggests deferred listings. This group may be unwilling (at least for now) to sell their homes at prices they perceive as “too low.” Eventually, death, morbidity or decreased financial circumstances will force these sales. When that happens, more inventory will dump onto the market.

Not all current inventory is being counted in the supply figures, particularly in the condo market. This takes two forms. Rentals are replacing sales as developers hope to generate sufficient cash flow to hold off creditors until the market turns around, when they can again sell at a profit. I recently read reports indicating entire developments in some cities stand empty and unlisted. Furthermore, houses in the midst of repossession may be abandoned but have not yet reached formal listing.

While Congress recently extended unemployment benefits, that extension did not increase the time jobless benefits are paid. With the dismal job creation, more families are running out of those benefits as their unemployment has extended past the limit for payments. Many of these families will be forced to move.

Lastly, builders continue to construct new units. They are sitting on expensive land with mortgages that must be paid or they too will be foreclosed. Many of these builders are in survival mode and will build smaller houses with less expensive accoutrements in order to meet lower price points (and appear to be decreasing prices.) While they may hope to earn modest returns on these houses, their real economic drive is to reduce debt burdens by selling parcels. I suspect those with deep pockets can find some very attractive deals on raw land currently—which undercuts the market price much the same way distressed sales depress the prices for all completed homes.

As housing prices continue to tumble, Congress may consider a second round of support. I don’t think anything will pass, but the possibility will keep first-time buyers on the sidelines. Why buy now when prices continue to decline and it’s possible the government may throw money at you later?

A grim picture, indeed. This too shall pass. Eventually the continued weakness in the housing market will flush the remaining weak owners and builders from the system. Once that is done, housing prices will stabilize and start to rise. Just don’t hold your breath.


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