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No Job = No New House

Written by admin | May, 23, 2013

new-home-sales-vs-unemployment-082311Not surprisingly there is more bad news coming out of the housing sector. Following, last week’s report on existing home sales, which as usual suprised economists that have enternal wishful thinking, that showed contraction; today’s report on the still overbuilt new home market showed yet another decline.

The annual sales rate for new homes fell to 298,000 units, down 0.7 percent in the month. The report includes significant downward revisions of 12,000 to June, now at 300,000, and of 6,000 to May, now at 315,000.

Prices of existing homes also contracted in July as they did for the median price on new homes, down a steep 6.3 percent in the month to $222,000. The average price for a new home was little changed at $272,300.

If there was any good news in the report it was that supply didn’t build, holding at 6.6 months. New homes for sale slipped an adjusted 0.6 percent in the month to a new record low of 165,000.

The outlook for the new home market, as well as for home builders, remains very bleak. While economists point to low interest rates being an incentive to buy a home the problem is that potential home buyers are lacking for a variety of reasons:

  • There is a heavy supply of low priced existing homes
  • Unemployment remains a major concern – with Americans out of work or concerned about keeping work they aren’t going to take on a new committment
  • With 1 in 5 mortgages underwater consumers can’t sell their home to move to another locale with better job opportunities (lack of mobility)
  • Even with low interest rates – getting credit is extremely difficult
  • Higher downpayment requirements will continue to exclude many potential home buyers as savings rates remain low
  • Backlogs of inventory on banks balance sheets will continue to erode home prices.
  • Consumers are locked in a balance sheet recession – liquidation of debt over consumption will remain a stagnating factor on home sales

New home construction is critical for economy recovery as it is a huge multiplier, along with manufacturing, of every dollar input.  Therefore, it is not surprising that new home sales are viewed as a guage of economic momentum.  Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase.

Unfortunately, in order to buy a new home – you need a job and a downpayment.  As you can see by the chart the total persons employed versus the population in total (employment to population ratio) has a strong bearing on the number of new homes sold.   With jobs lacking, household formations at lows, personal savings limited as consumers are focused on paying down debt as year over year wages and incomes decline, there will continue to be a huge drag on the real estate market in general which in turn points to weaker economic outlooks ahead.  This is going to be a long slow road to recovery.

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