While Wall Street celebrates the 10% surge in existing home sales, let’s not forget that just last week we were groaning over a 10% drop in new home starts – 30%, year over year.
What seems to be happening is this: the economy generally is reviving (so sales are picking up), but the country is so overbuilt with housing stock that there is no occasion to add new homes, the existing inventory can more than meet rising demand.
The pickup in home sales is an indicator of recovery, not a driver.
8 responses so far
1 ottovbvs // Nov 23, 2009 at 5:42 pm
…..er…… David……. the sale of existing homes after a lag is a driver of new home starts…..I don’t disagree we’re overbuilt and that consequently new home starts are going to be in the dolldrums in national terms but a lot of the overbuilding was concentrated in about six states (I used to be in the construction equipment business)…..you forget we don’t have one housing market in this country we have at least 50…….these were great numbers
2 cpanza // Nov 23, 2009 at 6:19 pm
I live in an area of the country where the speculative home building for years was simply mind boggling. There are scores and scores of homes here with no one in them. It’s going to take quite a while before people are building here again – -there’s too much of a glut of empty houses.
That said, with new home sales up 10%, that’s pretty big. To re-cork the champagne because no one is building where there are ghost towns full of empty homes is a bit too much to ask. 10% up is a nice jump towards filling up those homes and then towards new ones.
3 James Cody // Nov 23, 2009 at 9:37 pm
My understanding is that existing sales are up because they are distressed sales: short sales, foreclosure sales, substantially under-priced sales, etc. New starts generally aren’t distressed sales. (Obviously, new homes will be distressed in a certain sense — real estate is down, the market is bad, builders aren’t going to get as much as they expected, etc. But that’s likely not nearly as significant as when you have sellers who are short sellers, lenders selling foreclosed properties, sellers in an existing market area with a high number of foreclosed properties, etc.)
Put another way, existing sales are up because of people looking for bargains among cheaper homes, but otherwise, home sales aren’t going too well. Generally, these circumstances are not a sign of economic strength, but rather of a still weak real estate market, which likely indicates a still weak economy. (With all due respect, your theory doesn’t make sense: If the economy is generally reviving, it shouldn’t matter whether homes are existing or new (obviously certain buyers prefer new, others prefer existing, but generally, in terms of the supply and the demand, it shouldn’t matter to a buyer whether his purchase is from the existing market or the new market). So, there must be a specific reason why existing are picking up while new are not. The explanation seems to be that existing sales are up because of the significant number of distressed sales, while new homes generally are not distressed, or at least not nearly as distressed.)
4 ottovbvs // Nov 24, 2009 at 9:08 am
James Cody // Nov 23, 2009 at 9:37 pm
“So, there must be a specific reason why existing are picking up while new are not. The explanation seems to be that existing sales are up because of the significant number of distressed sales, while new homes generally are not distressed, or at least not nearly as distressed.)”
……It would be hard to get an interpretation more wrong…….there are still huge inventories of new homes in those states most affected by over building that developers are desperately trying to unload…..you need to take a few trips to NV, FL and CA……..I’m not sure what you mean by “underpriced sales”……do you mean sales at prices that reflect the general level of demand in a given market……house prices across the country have declined by about 27% since the peak but variances by market are considerable even within a state……for example prices in CA in the valley are down 35% while in west LA it’s probably only 5-10%……in my own state on the east coast they’ve fallen by about 18% but according to realtor contacts of mine they are now rising slightly and the pick up in volume this summer has been quite brisk…..obviously distressed sales are part of the picture but the real estate market is unquestionably on the turn
5 WillyP // Nov 24, 2009 at 9:46 am
Home prices have to fall. Because of the speculative boom set in motion by loose monetary policy, savings were directed into the housing sector that should not have been. Unsurprisingly, this led to a so-called “glut” in housing – in common parlance, too many houses, to few customers, at prevailing prices.
Owners of unsold houses have to drop prices in order for them to clear. If they take a loss, so be it. The assets do nothing sitting unsold on their books, and they will drop their prices. The only thing that will delay this process is promise of tax payer subsidies, which will serve to prop up prices, effectively serving as a transfer of wealth from the tax base to home builders/owners. This is what we’re doing – delaying (indefinitely) liquidation.
People who were unfortunate enough to purchase a home and keep it in the bubble ramp up are now likely sitting with a negatively valued mortgage: paying for a home worth substantially less than they paid. If these people can no longer make their payments (unemployment being 10.2%, at least), they will default. Some people may decide it’s better to liquidate, take the loss, and buy a home for a reduced price.
Others, who are just on the cusp of default, could be helped by legislation that make renegotiation of contracts more flexible. This mess is the consequence of a massive monetary pumping – there’s not much else that can be done.
This view is confirmed by today’s WSJ:
“The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery… Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.”
http://online.wsj.com/article/SB125903489722661849.html?mod=mktw
6 James Cody // Nov 24, 2009 at 10:09 am
“It would be hard to get an interpretation more wrong.”
There’s nothing like anonymous blog posting to bring out the arrogance in all of us. In any case, I find this guy’s analysis (linked below) more persuasive than yours. Note, this link is only one example of his posting, it takes reading for him awhile to get a full picture of the real estate market, and he’s been mostly spot on for the past five years.
http://www.calculatedriskblog.com/2009/11/existing-home-sales-distressing-gap.html
7 Carney // Nov 25, 2009 at 10:41 am
Does anyone think this administration is going to ease the pressure that W. increased on lenders to hand out below market rate loans to low-income, low-collateral, low-credit, high-risk minorities? Of course not; if anything Obama will increase it even more, with more vapid rhetoric about fighting “redlining” and “opening the doors of opportunity” and “tearing down barriers to the American Dream”. And so we’ll see another tidal wave of predictable foreclosures, lenders saddled with even more ruinous bad debt, and as the cherry on top, the same lenders dragged before the court of public opinion and even congressional hearings on the charge of “recklessness”.
8 WillyP // Nov 30, 2009 at 9:47 am
“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.
Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.”
-Warren G. Harding, 1920, in accepting the Republican Party nomination for President.
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