New Construction Still Dragging

New information from the U.S. Commerce Department released yesterday shows that new construction continues to be very slow, and the future outlook doesn't look much better.  Home builders built 571,000 new homes last month, a 5% decline from a month ago and the lowest level in the past three months.  Roughly two-thirds of new construction units were single-family homes.

Many economists are waiting for the new construction market to pick up the pace of building and for the market to start improving.  One major obstacle is that it is quite a bit cheaper to purchase a previously-owned home in this market, which is heavily skewed towards buyers.  While the price of a previously-owned home has fell roughly 35% over the past 5 years, the cost of materials to build a new home has been flat or rising during that same period.  This has lead to a large gap in price between previously-owned and new construction homes.

Another obstacle is tightened credit.  Cash-strapped builders have found it harder to obtain credit, a situation which halts projects that would have likely moved forward.  Even where there is adequate demand, builders can't build if they can't obtain the appropriate financing to do so.

There are at least a few reasons to have some optimism.  For one, most of the data indicates that the market is at the bottom.  When you are at the bottom, the only place to go is up!  This probably isn't very encouraging for builders themselves, but this should mean increases in new construction over the next year or two.

Another encouraging bit of news is related to our population.  As population grows, people need places to live.  With the rental market already tight, and previously-owned inventory falling, there has to be an increase in supply somewhere.  This could very easily come from new construction.  The real question becomes:  Will this new-construction be in the form of single-family homes, or more affordable multi-unit structures?  Only time will tell.

New Housing Data Released

The Minneapolis Area Association of REALTORS released new housing data today, and while there are some areas of optimism, questions still remain as to how long it will take for the market to show signs of a true recovery.

On the positive side, market inventory fell significantly compared to a year ago.  As always, it is important to keep "one year ago" in perspective - just over a year ago, the federal first-time homebuyer tax credit ended.  Most credible analysts believe that, while the tax credit may have played a role in dramatically stabilizing a real estate market in free-fall, it is also believed to have distorted the market - perhaps by as much as 10%.  Lower market inventory is helping return the market to what analysts consider "balanced" - that is, somewhere between five and six months worth of inventory on the market.  That number currently stands at 7 months.

Purchase activity also showed marked improvement from a year ago.  Activity has increased roughly 46% compared to one year ago, even amidst tightened credit and market uncertainty.  Again (and I hate to sound like a broken record, but this is a very important detail), we are comparing to a period of depressed activity after the end of the federal tax credit.  But 46% is still a significant number, and I think it shows that market activity has remained strong, even despite the lack of federal housing incentives.

But what really matters to buyers and sellers are prices.  Are they up?  Are they down?  Are they flat?  Well, in the very short-term (i.e. in the last six months), we are seeing a small but clear trend towards fewer seller concessions.  But if you take a longer perspective, prices have fallen.  Compared to a year ago, the median sales price is down 10.9% (remember that distortion from the tax credit that we talked about?).  And somewhere between 1/3 and 1/2 of all homes with mortgages are underwater (depending on whose numbers you believe). 

It is abundantly clear that, although other pieces of data show encouraging signs, the only one that matters to people (price) is still struggling.  My opinion is that as the the market continues to balance itself with less inventory and higher purchase activity, we will see some small gains.  Let's imagine it's September 13, 2012 - my prediction is that the data will say that housing prices were up compared to "a year ago."  Check back with me in a year to see if I was right!

At the end of the day, it will be very interesting to see where the market goes over the next 6 months.  There have been (seemingly serious?) talks by the Obama Administration about how to "fix" the housing market.  Some have speculated that Fannie Mae and Freddie Mac might allow borrowers, whether current or delinquent, underwater or with equity, to refinance at current interest rates (roughly 4%).  I'm sure I could fill up an entire post about these plans, so let's save that conversation for a later date.