“New U.S. single-family home sales increased in March and the supply of new houses on the market hit their lowest level since August 1967, but prices fell from a year ago.” This is really no surprise as the 30-Yr mortgage dipped a bit in the last month spurring some speculative buying by those poor suckers who think they are getting a bargain just before the flood of foreclosures begins hitting the market.
But here are the real numbers to be looking at – compared to March last year sales were down 21.9 percent. Furthermore, the market for new homes is being squeezed by competition from previously owned homes and a deluge of foreclosed properties, even though inventories of new houses are at a 43-1/2 year low – which is only due to plethora of home builders who are now out of business altogether. A report last week showed there were 3.55 million previously owned homes on the market in March, well above the economy’s natural rate of between 2 million and 2.5 million. Also, when you take the number of foreclosed homes and those that are highly delinquent are taken into account, economists say supply is anywhere in the range of 8 million to 9 million.
The charts here really tell the story. Household formation is dropping due to high levels of unemployment and with the unemployment to population ratio still hitting levels not seen since 1984 – the likelihood of a dramatic uptake in home buying anytime in the near future is highly unlikely.
Here is the “Catch-22” to all of this – new home building, as we have discussed in the past, is a key driver to employment, economic growth and wages. Without home building it is highly unlikely that any real economic growth can begin until employment begins to increase. However, without housing driving the backbone of the economic recovery it is highly likely that employment will remain suppressed and will keep household formations at a low. Therefore, housing will most likely have to get much worse before it really begins to get better as the excesses have to be flushed from the system. In order to do that there is a lot of inventory that has to be absorbed and prices haven’t come down nearly far enough yet to bring long term real estate speculators back into the markets.
One thing to consider, however, is the grenade pin to all of this which is interest rates. If interest rates rise before the housing debacle is rectified, and since home prices are simply a function of monthly payments, prices will drop dramatically flooding the system with more inventory as distressed homeowners and banks panic to sell. The backlog of inventory will skyrocket and the real bottom in housing will be put in. It is a scenario that the banks and the government are struggling to avoid with a variety of programs but in reality the end game in real estate, and in a lot of cases for the banks themselves, is but a few interest rate ticks away.