New Homes Market: Worst Supply-Demand Situation Since Early 1970s
This is just a follow up from Thursday's report on new single-family home sales for July. Asha told you that new single-family homes sold in July were down 22.2% from year-ago. As sales of new homes cratered, new homes for sale in July skyrocketed up 22.44% from year-ago (see Chart 1). Subtracting the change in new single-family homes for sale from the change in homes sold yields the data contained in Chart 2, which is not pretty for July. The difference for July 2006 is minus 44.66% -- the most negative reading since July 1972. By this measure, then, the supply - demand situation for new single-family homes is the worst since the early 1970s. This suggests that "effective" prices - i.e., prices adjusted for free granite kitchen countertops - will be falling in the coming quarters and that residential construction activity will continue to contract. Falling new home prices will put downward pressure on existing home prices. Downward pressure on existing home prices will have a negative impact on consumer spending in that home equity available to extract will be growing at a slower pace or even declining. Downward pressure on exiting home prices also could lead to increased mortgage defaults as home-"owners?" wanting to term out their adjustable rate mortgages may find the amount needed to be refinanced is more than the new lower appraised value of their home. Today H&R Block announced that it setting aside $102.1 million as a result of increasing mortgage delinquencies being experienced by its mortgage-originating subsidiaries. Folks, the bursting of one of the biggest U.S. housing market bubbles, if not the biggest, are going to have a significant negative effect on the rest of the economy.
Chart 1
Chart 2
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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