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.

What Happens to Housing if the Debt Ceiling Isn't Raised?

I don't like to get political on this blog - I have my own opinions, others have their own as well, and I don't find it particularly useful to the goal of this blog, which is to present informative information to readers interested in the housing market, housing policy, and (to a lesser extent) mortgage lending.

But with all the hullabaloo in Washington DC surrounding the debt ceiling, I think it is useful to explore what might happen to the housing and lending market if the debt ceiling isn't raised.  As of this post, there are about five days remaining before America exhausts it's ability to borrow money and continue to meet it's already-appropriated obligations.

1.  Interest rates will surely rise.  If investors view the US economy as a riskier investment, they will expect higher yields for their money.  This scenario could very likely lead to an increase in mortgage rates as well.  An increase of just one percentage point on a mortgage will decrease the amount of money buyer's can borrow.  It will possibly price some buyers out of the market, which will exacerbate an already weak housing market.

2.  The small gains we have seen recently in new construction could be erased.  When the housing market burst in 2006/2007, new construction plummeted as well.  We have seen recent upticks in the number of new housing starts, and failure to raise the debt ceiling will likely cause developers to postpone new projects as they find financing harder and more expensive to come by.  This also puts construction workers out of a job, just when they need the jobs the most.

3.  Home prices could very likely fall.  We have seen a dramatic stabilization in home prices in the last two years, but if buyer's are unable to borrow as much as they previously were, fewer buyers will be in the market to purchase existing homes.  The laws of supply and demand tell us that if demand falls, so too will prices.

This is just the beginning of what could happen.  The housing market is fragile as it is, and an American default could very easily send the housing market back into the very doldrums it is trying to recover from.  By no means do I mean to fear-monger or frighten my readers, but the reality is that an American default has never happened before, and as a result it is difficult to predict what the fallout from such a scenario might be. 

Either way, the best we can hope for is for our elected officials to cease the current game of chicken and find some common ground - if only for the American people's sake.