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Existing home sales have plunged in recent months, but mainly because of the anticipated expiration of the homebuyer tax credit in November, which caused many to accelerate their purchases into October. Now that it has been extended, the pace of sales has settled back down, and may be returning to "normal." I note that the inventory of homes for sale has declined by 27% since its peak, as shown in the next chart, while sales activity has been relatively stable. This doesn't look to me like a market that is collapsing or off balance. And with inventories down, there is room for the market to absorb new foreclosures.
12 comments:
New homes sales are a good leading indicator. Housing will languish for a long time to come.
Balance sheet repair will take years to work off. Maybe even a decade.
As our population ages, the demand for new housing could head even further south.
Americans are in no mood to lever-up. We will revisit this story time and time again over the years.
Just look at Japan...
Scott,
It looks like the medicare cut didn't get cut in the Senate...this could bring some more houses to the market and take a few buyers out of the market.
It appears 23,000 will loose jobs from the shuttle winding down.
That could free up a bunch of additional homes as about 4.5 million are expected to be foreclosed this year.
With new home construction down 80% from a few years ago.....auto manufacturing down over 50%.....commercial construction practically non existent.......travel and entertainment down over 20%.....health care revenues evaporating........pretty soon we may not have much of an economy left if this trend continues much longer.....
Where do you think our economy would be if Obama wasn't borrowing almost $2 trillion per year?
Scott,
I would like your counter to these comments by John Mauldin and Dennis Gartmen. Or anyone else who would like to comment. I keep hearing from friends and associates about the upcoming catastrophe in commercial realestate. I have countered that, yes there is a problem there, but the commercial realestate market is but a fraction of the size of the residential market.
Bob
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"There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off. As more families fall into unemployment or underemployment, there will be more writedowns. Is it any wonder that banks are having to shore up their balance sheets and make fewer loans?
With capacity utilization just off all-time lows, why should we expect businesses to borrow to increase capacity? Inventory levels are much lower than two years ago. Businesses no longer need to finance as much inventory. They simply need less."
Dennis Gartman writes:
"Effectively the Fed had become a cash machine rather than a monetary expansion machine. At the end of last year, the multiplier had actually fallen to less than 1.0 and the trend remains downward.
If anyone had told us five years ago that the money multiplier would be down to 1.0 we would have laughed. The laugh, however, would have been upon us, for it is there and it is still falling.
Hard it shall be to sponsor strong economic growth when no one really wants to take a loan or when few banks want to make a loan. The "game" of banking has been turned upon its head, and the strength of the economy suffers while inflationary pressures (at least for now) remain virtually non-existent."
Bob: There are so many doomsday warnings like this floating around that it's hard to take them seriously. But here is how I would counter:
Re commercial real estate losses: First, $300-400 billion isn't all that much in the great scheme of things. More importantly, though, I would argue that while these losses haven't yet happened, they have already occurred in the market for commercial real estate backed mortgages (CMBS). The securities are priced to lots of eventual losses. The only unknown is whether the projected losses will be more or less than the actual losses. One very encouraging sign is that the prices of CMBS have been rising for many months now, which suggests that the market was initially way too pessimistic. The reality is likely to be less awful than what the market is expecting.
Re housing foreclosures: The world has known for many months that there is going to be a wave of housing foreclosures as mortgages reset. Securities collateralized by home mortgages are already priced to severe losses. As with CMBS, the losses have already occurred in the market. There will be disruptions of course as the foreclosures take place and people are displaced from their homes. No one knows whether the new foreclosures will depress prices further or not. I hear reports from the field that there is actually a shortage of homes for sale in areas where prices have plunged, so more foreclosures are eagerly anticipated.
Banks are reluctant to lend, but people are also very reluctant to borrow. Borrowing and lending don't drive growth, however, since they don't create new demand--they simply redistribute demand. It's likely that the banking system is not functioning as well as it otherwise might, so this adds up to a drag on growth, but it's not necessarily a killer for the economy.
Re inventories: inventories have fallen significantly, and the big boost to growth in Q4 was that inventories are declining at a slower rate mainly because demand is picking back up. This is very likely to continue, and eventually inventories will have to rise. I don't see a problem here.
Re the money multiplier: This is simply the inverse of the demand for money. Money demand rose sharply in late 2008, and it began to decline in the second half of last year. As confidence in the recovery rises, the demand for money should continue to decline and the money multiplier could rise.
Inflation pressures are still low because the demand for money is still unusually high. All the money the Fed has pumped into the banking system is still held on deposit, unused, at the Fed. This is already in the process of reversing. We just don't know how fast this will occur however. The real question is whether the Fed will be responsive and withdraw the money it has injected before bank lending takes off. If the Fed is slow to react, then inflation could be huge.
Borrowing and lending don't drive growth, however, since they don't create new demand--they simply redistribute demand.
Scott,
Can't it be argued that borrowing and lending advance demand. And borrowing from our Pension Funds and Retirement Accounts take demand that wouldn't have been tapped for years and brings it forward.
And if we lend to areas that are simply consumption based, such as health care, welfare and housing....when the savings runs out.....demand evaporates and so does the economy.
When George Bush took office in 2000, America had a total of $25 trillion of public and private debt. By the time he left, total debt mushroomed to over $50 trillion.
If a significant portion of our GDP was simply based on borrowing from the future and spending now.....we may soon find out there is not much future left to borrow from.....unless of course we inflate currency to worthless.
Scott,
I can tell you first-hand the foreclosure market in Phoenix is absolutely booming. I don't know how that plays into the statistics.
Paul: so how are prices behaving with surging foreclosures?
Scott, I don't really have a handle on that, I imagine it's cutting into new home sales big time. I can tell you we just flipped a foreclosure that was on the market for around 2 hours and cleared around 18 k. We'll be bidding again on Monday.
Thanks, that reinforces what I've been hearing. This real estate market is far from dead.
Scott,
I truly do love your optimism. I need to get a lot more.
After March of 2000, the volume in dot.com stocks were far from dead as well. Millions of shares would trade day after day, week after week, month after month.
And for periods of time, they would go up in value 10%, 20% and more....until eventually they all went to zero.
CalculatedRisk has a great post referencing an article from the LA Times about how many are living in their own homes rent free and the banks are not foreclosing. If this trend catches on, pretty soon, many will simply stop paying on their mortgages and few will have an incentive to pay anything for owning a house.
http://www.calculatedriskblog.com/2010/02/living-rent-free-homeowners-become.html
Thanks for you optimism during a period of uncertainty.
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