Mar 26 2007 10:02AM | Permalink | Email this | Comments (5) |
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Another plunge in new home sales postpones recovery in the housing market and aggravates the woes of homebuilders as well as mortgage and real estate brokers. February new home sales fell to an annual rate of 848,000, a seven year low. Sales in previous months were also marked down sharply, pushing the inventory of unsold new homes to an 8.1 month supply.

Reed Construction Data has slightly lowered the 2007-08 forecasts for both housing starts and residential construction spending which further weakens the sales outlook for construction materials suppliers with any significant exposure to residential markets. Housing starts are expected to total 1.544 this year and 1.708 next year. Total construction spending, including inflation, may not increase in 2007.

Home sales data typically track with mortgage applications since sales are recorded when homebuilders accept bids from buyers. With applications off 8% in February, a decline in existing home sales is now likely to be reported for last month which will add to the bloated inventory restraining housing starts. In turn, this means that the earlier reported February pickup in housing starts may be temporary; a few more months of lower starts may be needed to balance starts and sales.

Nonetheless, the housing downturn has largely passed through the front end of the market (starts) and is now at the back end of the market (sales) where it will linger for many months. The core of the housing market, new, move up and scale down homes for households that can afford standard mortgages, remains reasonably firm, except in the Midwest. These buyers are hesitant to act with home prices in flux. That is both the prices of the homes they are considering buying and the price of the home they may need to sell to be able to buy. How much starts fall further depends on how much of a restraint uncertain pricing is having. This is hard to estimate but we believe the restraint from uncertain pricing will be easing soon although it will not disappear this year.

That housing is a local market has seldom been clearer. Most markets have experienced little downturn and some are now expanding. These are mostly smaller market plus markets in larger metros passed by the 2004-06 housing boom fueled by home purchases by speculative and mortgage-subsidized buyers. The severe problems with excess inventory and plunging home prices are in the formerly overheated housing markets. The inventory surpluses in these markets will not be absorbed, permitting starts to rebound, for a long time, maybe not even next year in some markets.