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New Homes Sales – Glued To The Bottom

Written by admin | Oct, 26, 2014

home-sales-to-rates-102611-2We have written several articles lately about the housing market (here, here and here) and its relative importance to the economy.   While mainstream economists and analysts continue to look at each and every data point as the sign of the “second coming” for the housing market the reality could not be further from the truth.

This is ultimately the problem with “Operation Twist” and the HAMP/HARP programs.   Those that can afford to refinance their homes are doing so in droves in order to bring down monthly mortgage payments and create additional cash flow.  I am doing it myself for the same reasons.   However, for the rest of the 11 million American homeowners that are underwater in their mortgage, unemployed, delinquent, etc., the impact of lower interest rates is  completely lost.  This is also why continuing to artificially suppress interest rates is having zero effect on an creating job growth as aggregrate end demand doesn’t foster needs for expansion or production.

home-sales-to-jobs-102611Furthermore, as opposed to existing home sales which has a low multiplier effect on the economy, new home sales are critically more important as an economic contributor.   Each dollar invested in building a new home has roughly about a $4 impact in GDP as each new home requires everything from architects, contractors, roofers, painters, landscapers, flooring, furnishings, etc. all which receive a direct benefit from each house being newly constructed.  The sale of an existing home has little carry through.  The problem, however, and why sales remain glued to the lowest levels since 1963 comes down to jobs.

There are several problems to home sales that occur with joblessness.  The obvious is that without a job you can’t qualify for loan to start with.  However, without income the number of delinquent mortgages will continue to rise as more and more individuals run out of benefits.  This in turn will continue to suppress property values and sales as inventories rise.   

This is a problem that government faces regarding HARP.   The plan to refinance homeowners, to keep them in homes that they can’t afford to begin with, keeps them trapped in their home.  While they may now be able to afford a lower payment value they can’t sell the home in order to move because of the loss in home value that will be incurred. In turn, banks which are holding the homes on their books at much higher values, even though they are delinquent in some cases by more than two years, are unwilling to sell the homes at distressed prices due to the impact to their capital which is already in a weakened state.

This “lack of mobility” keeps individuals from being able to move to where jobs are.  This in turn keeps sales suppressed, and ultimately, unless a real job and economic recovery is imminent, then these same individuals will wind up defaulting again or simply walking away from the home altogether.  In either event the home now decreases in value and adds to existing inventory that needs to be sold causing further pricing problems.

Lastly, the problem of the swelling supply of existing homes for sale is that they compete for new home sales.  This will eventually evolve into a full scale price war as banks and homeowners eventually come to the realization that liquidation of properties is their only option.   This is going to drag prices of home substantially lower which will exacerbate the economic problems as displacement drags on consumption temporarily.   However, in the long run the clearing of excesses will allow the housing market, and ultimately the economy, to begin to recover from more normalized levels.

All in all there is little to get excited about with today’s report.   Sales of new homes have stagnated temporarily at very depressed levels but there is a high likelyhood that they could remain at these levels or lower until the clearing of excesses in the housing market is complete.

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