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Friday, September 28, 2007

Back to the Eighth Grade for August Housing Statistics

Monthly housing statistics dribble out at different times. We collect and summarize them in terms of that major economic concept from grammar school, the law of supply and demand. So let's go back to the eighth grade and see what's up.

The Quick Summary
Inventories must decline in a large way, meaning that builders must slow down, prices will have to drop, and lending will have to stabilize before anything approaching a normal supply/demand relationship returns. There is evidence that this will take....some time.

**On The Supply Side**
Inventories: The number of homes on the market continues to rise, and now stands at a 10.0 month supply. This is excessive when we consider that a 6 month supply is widely cited as a market in equilibrium.

The bull markets of 2004 and 2005 carried supply of only around 4.5 months. We are 122% above those heady times, and 67% above a "normal" market supply.

Inventories have risen 20% since March of 2007 alone. We have not seen a worse reading since February 1988 when housing held a supply of 10.3 months. Sure sounds like a really soft market from here.

In terms of the law of supply and demand, the inventory picture is persuasive for both buyers and sellers. The blog Housing Intelligence has a graphic representation of the relationship between inventory and sales from 1999 to the present, with a supply/demand based analysis.

New Permits, Starts and Completions, (census.gov): The most recent data, (PDF), illustrates once more, the degree to which the market is trying to adjust by putting the brakes on production. New permits were 24.5% less than August, 2006, starts came in at 19.1% under last August, while completions registered a 19.0% decline.

These percentages have been similar for a number of months now, to the point of being repetitive. Nevertheless, inventories have risen for 9 straight months to lofty levels.

With the money and lending news, most would suggest that only a drastic decline in supply, spurred by lower prices will bring those buyers back onto the scene. Market parity looms as a phenomenon of the future in this light.

**Demand Factors**
The numbers for both new and exiting home sales continue to decline. As in past months, the rate of sales has done nothing to bring the supply side of the market back to earth. Here is the rundown:

New Residential Sales, (PDF), clocked in at 21.2% less than last year. This represents a seven year low according to Builder Online, by way of AP, which added this tidbit on prices:
The median sales price in August fell by 7.5 percent from a year earlier to $225,700. That was the biggest drop in percentage terms in nearly 37 years. The median price is the middle point at which half sell for more and half for less. The average sales price dropped by 8 percent in August from a year earlier to $292,000. That was the biggest decline in 17 years.
Existing Home Sales, (PDF), showed a 12.8% decline from a year ago, and CNN Money has reported this as the lowest level in five years.

For mortgage applications, the most recent report from 09/26/07 shows a decline. To our minds, refinance activity always needs to be tossed aside in this report in order to accurately measure the magnitude of new buyers. Not surprisingly, new purchase applications are down, while refinance represents something on the order of 45% of all mortgage applications.

For August, (the first month that ARM resets topped $50billion, and foreclosures boomed), it was reported that 21% of prime borrowers and one third of sub primes failed to close. The cancellation rate during 2004 was 4%.

In the next year, ARM resets will double to more than $100 billion/month and will not go under $50 billion again until August of 2008. Many believe this is a potent feature.

Counting on lower rates? For a primer on the impact of interest rates, The Federal Reserve, and what it all means for the market, Interest Rate Roundup has an excellent review.

So What's The Forecast?
With a market so strikingly oversupplied, it might be said that the vast majority of buyers and sellers do not need to know anything about interest rates. They need only to sit back and wait for price tags to tumble, at least for a while. The fundamental facts here are that inventories are painfully high, they continue to rise, and sales are not robust enough to absorb supply.

Prices have a long way to go in order to remedy this. It has been suggested that the market will see double digit percentage declines in price in order to find stability. Who knows?

No matter what particular mechanism of supply/demand ultimately restores balance, the situation will persist for...some time yet.

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Black Bear Realty Website
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