As Good as It Gets for the New Housing Market
I have become a real fan of the CalculatedRisk blog. This article summarizes some of the headwinds faced by new home builders.
Figure 1. Total New and Existing Home Sales and the gap between them (source: The CalculatedRisk blog).
1) The stimulus funding for home buyer tax credits has generated demand for homes, at the expense of draining the pool of future home buyers. There does not appear to be any political will to extend these credits. Short-term demand for total homes is likely to fall (Figure 1).
2) Foreclosures and distressed pricing of existing home sales will continue to increase in the mid- to high price ranges, but appear to have peaked overall in 2009. They will continue to remain at higher than historical levels in the lower price ranges (Figure 2).
I am personally concerned about the possibility of a double dip recession. While economic demand is increasing off of last year’s lows, we are not growing top line economy-wide revenues as would have been expected for recessions of this size.
This period looks remarkably like the 1974-1976 period; and the key to housing, and the economy in general, is unemployment. If we stay above 9% through the end of this year, I believe that the economy, and therefore housing, will remain (at best) at anemic levels.
3) The continued high levels of foreclosures, combined with high unemployment, will continue to drive pricing in housing to low levels. These levels will probably be below replacement costs, and we will continue to see low levels of new homes to existing homes sales ratios (Figure 3).
Figure 3. The ratio of new homes to existing home sales (source: The CalculatedRisk blog).
It took 4 years to reach this level of lows in the new home to existing home sales ratio. Given the current economic (and political) environment, I would expect that it will take a similar amount of time for new home sale to recover to the long-term average of ~15-20% of existing home sales. However, return to this level would also be commensurate with a return to total new home sales of about 600,000 to 800,000 units, which is nearly half of the peak in 2005 (Figure 1).
This, of course, is a national average. Places like Florida, California, Nevada, and Arizona may have a longer recovery period.
A recovery of the new home housing market, to half of its peak, in 4-6 years, will not feel like much of a recovery. It will feel more like survival.
