Economists On New Home Construction

The WSJ Real Time Economics site is always a good place to visit when major economic date is released. Today, they have a good roundup of thoughts on the housing data. Here is one entry:

The bright spot in this report is that there is now so little new homebuilding in the pipeline that the inventory of new homes available for sale is declining rapidly. If sales stabilize over the near term — which we believe is likely given the recent plunge in mortgage rates — then we should reach a normal level of new home inventory by mid-2009. Of course, the overall stockpile of homes available for sale will continue to be bloated by foreclosure activity, which should continue to exert some downward pressure on home prices over the near term. –David Greenlaw, Morgan Stanley

The reality is that there is an incredible of inventory of homes throughout the country and particularly in the hit hardest by the downturn in housing. Despite some fairly brisk, at least by recent standards, purchase activity the inventory of foreclosed homes has shown little decline. Obviously, new foreclosures are filling up the pipeline as quickly as homes are sold out. Efforts at slowing the pace of foreclosures are likely to be forthcoming from the new administration. While those efforts will probably slow things a bit, if history is any guide, they may just push the problem down the road. It’s going to be hard to get around the historical failure rate of loan modifications particularly in a deep recession.

Investors have purchased a goodly number of the foreclosed homes in the past nine months or so. While they may be true investors as opposed to purchasers who are looking to make a quick flip, there is going to be a not insubstantial portion that will bring their homes back to the market when prices start to firm up. Add to that shadow inventory the inventory of owners who would like to sell but have put off the process until the market stabilizes and you have the ingredients for a rather long period of market stagnation.

One other factor that perhaps hasn’t received the attention it deserves is the degree of market disruption that this entire episode is imposing. We may well be creating a rather large percentage of owners that are trapped in their homes. Saved by loan modification efforts from losing their home, they may still remain substantially under water from an equity standpoint. If that does become a reality then the normal dynamics of the market are going to be seriously dislocated.

It, therefore, gets a little difficult to see just how the homebuilders are going to experience a turnaround of any great significance any time soon. Right now they cannot compete with foreclosed homes on a price basis. Help from Washington in the form of tax credits might help narrow the price gap if it only applied to new construction but it’s hard to see that flying politically. Moves like that could also create as many problems as they solve.

Things can and do change but barring some rather remarkable turnaround in the economy it is really hard to see anything but a multi-year struggle for the new home market.

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