Thursday, March 02, 2006

State of the US Housing Market...

As your Econ 101 professor would tell you when supply grows and demand weakens you should expect prices to fall to a point that will spark increased demand.

Thus, far price declines have been relatively minor, but I believe this is principally due to sellers taking a wait and see attitude with the market. However, there are 2 factors that I believe can quickly change the pricing landscape - 1) new construction continues to escalate and builders (often with construction bridge loans) will need to sell in order to repay their loans and 2) rising rates push low-equity buyers out of their mortgages.

"Sales of new homes fell 5.0% in January to an annual rate of 1.233 million units, after an
upwardly revised reading for December. The details of the report are noteworthy for several

1) The January decline is the fourth monthly drop in the last six months.

2) There was a 5.2-month supply of unsold new single -family homes in the market place, the largest supply of unsold homes since November 1996."

3) The number of new houses for sale under construction and completed show an alarming upward trend.

Asha Bangalore - Northern Trust - Feb 2006

The number of new houses for sale under construction has rarely crossed 200k units (1978 and 1990 bubbles). Since 2000 this number has spiked from 180k units to almost 320k units.

It is important to note that thus far pricing has remained relatively firm, but if interest rates continue their march upward and newly constructed homes sit on the market for 6+ months, I believe that this orderly real estate market could become very disorderly.

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