Housing watchers pin hopes on 2015

What it will take to reduce oversupply of new homes

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Oct. 14, 2011

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What it will take to reduce oversupply of new homes

Steve Bergsman
Inman News™

Economists are like ancient soothsayers; they, metaphorically speaking, throw a bunch of crazy stuff into a big cauldron, heat it all up over a roaring fire, and then divine the future by reading the bubbling contents.

The trouble is, no two soothsayers use the same secretive ingredients. I mean, do you throw in one eye of a toad or two, or one or three cups of crushed mandrake?

Looking over a couple of midsummer data reports, it appears the soothsayers have decidedly contrasting views of where the U.S. housing market is headed. Some have opted for the optimistic viewpoint, but others fall into the camp of the cautious. Who knows? Maybe they are both right.

At the beginning of August, the Wall Street Journal reported the number of homes listed for sale in U.S. cities declined during the second quarter. The Journal story focused on Realtor.com numbers that showed by the end June, nearly 2.34 million homes were listed for sale by multiple listing services in more than 900 metro areas, the lowest level for that time of year since 2007.

The article spotlighted such metros as Miami, where listings were down 43 percent; Washington, D.C., down 30 percent; and Charlotte, Seattle and San Francisco, down more than 20 percent.

Oracles have concluded from this data: Shrinking inventory means demand is rising, and that's a very good thing.

I checked in with Jed Smith, managing director of quantitative research at the National Association of Realtors. NAR uses a wider universe of sources, showing an inventory in June of 3.765 million homes, a slight uptick from May's 3.646 million homes -- essentially a flat market.

"We have been skidding along the bottom of the market for three years," Smith said. "Some years, some months, we are up a bit; some years, some months, we are down, but overall the market has shown between 4.8 million and 5.2 million homes sold. Overall, it has stayed around 5 million in home sales."

The real positive news comes from other divinations.

First, in June 2011 home prices rose 1 percent from the same time period the year before, Smith said. When comparing June numbers to the month prior, average home prices jumped from $160,000 to $184,000, a major leap forward.

"Home prices always go up at that time of year, but not that much," Smith said.

Secondly, there's the inventory situation. "Some time ago, we were approaching 10.1 months' inventory; in recent months, we were down to eight to nine months," he said. "Before the recession, we were generally at six to seven months."

What does this all mean?

Here's Smith interpretation: "We are starting to see some stabilization in inventory and home prices. The market is poised for a recovery, but for that to occur we have to see a little more confidence in the economy. We are headed in the right direction. While it is a slow recovery, it does continue."

All that put me in a good mood, which lasted as long as my phone call to Jonathan Smoke, executive director of research at Hanley Wood, which produces the Housing Intelligence report.

I turned to Smoke because housingintelligence.com had done a study of housing product overhanging the market, and the future as predicted by this scattering of the bones didn't look so rosy.

Housing Intelligence scrutinized the long-term average of new-home sales over a 50-year period and came up with 675,000 homes sold annually. As we all know, new-home sales skyrocketed in the first decade of the new century, yet by November 2004 there was a cumulative total of 1 million housing units of oversupply compared to the long-term average. That oversupply number peaked in March 2008 at 2.4 million units.

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