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Is The Housing Market Regaining Its Balance?

Pending home sales posted their largest gain in 7 years, up 6.7% (and positive gains three months in a row). Of course, large percentage gains are easier when the denominator is small, but this is still good news, in part because these people are not “flippers”, speculators hoping to flip their agreement at a huge profit before settlement. With “flipees” non-existent, these are meaningful buyers.

Housing starts are still very low.

In 2006, we built new houses and condos and rental units at a 2 million plus annual rate (well in excess of what demographics would support). Speculation on housing replaced the “dot com” insanity, even though it had to be very clear to even the casual observer that we were collectively building units far ahead of basic demand. The outcome was unavoidable and should have been clear to all, especially the big builders who collect market intelligence. When supply dramatically exceeds demand, prices must fall to reduce inventory and will fall until supply and demand are in balance, whatever it takes.

The problem is that even at a very low price, most people have no need for a second home (and don’t want the cash flow obligations attached). Perhaps a new breed of speculators is emerging, especially in the condo market, investors with cash and the patience to wait for demographics to catch up with supply. Blocks of condos in big projects are being sold off by initial financers and investors at bargain prices. Buyers with the best credit can’t get a mortgage to buy a new condo in a project that is only 20% sold out – the risk of project failure is too high.

Everybody is living somewhere, renter or owner. So motivating them to move may generate fee income, but doesn’t exhaust the stock of excess residences available. Only (1) throwing the kids out, (2) more demand for second homes, or (3) population growth and family formation will solve this problem. Many who would be OK home owners were sold a house that was too expensive with a mortgage with terms too good to be true (and they were). These “foreclosed” individuals will take years to rehab into home owners again.

So, progress is being made. But residential construction, normally about 5% of GDP, is down to 2.8%. Expenditures are down almost $300 billion since 2005. The problem is being resolved, but slowly (since demographics improve slowly). In heavily overbuilt markets, prices aren’t through falling yet, but likely to slow as those who can’t “hang on” are mostly flushed out into the pool of foreclosures (and sales are growing in those heavily overbuilt markets).

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William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.