Builders May Have Seen the Worst of Current Downturn
Although the current housing slowdown is expected to persist into the middle of next year, on a national basis builders may have seen the worst of the downturn, according to economists, a view substantiated last week by reports of new and existing home sales stabilizing in October.
“Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets,” said Federal Reserve Chairman Ben Bernanke in a Nov. 28 speech before the National Italian American Foundation.
Bernanke also cited the University of Michigan's recent survey of consumers that showed an increase in the share of respondents who believe that now is a good time to buy a home, from 56% in September to 67% in November, and noted that the index of mortgage applications for home purchases has been trending up since July.
“Although these developments are encouraging, we should keep in mind that even if demand stabilizes in its current range, reducing the inventory of unsold homes to more normal levels will likely involve further adjustments in production,” he added.
A Falling New-Home Inventory
Figures released by the Commerce Department last Thursday showed the inventory of new single-family homes for sale falling for the third consecutive month in October. At today's sales pace, it would take seven months to clear out the backlog of unsold homes. Completed homes for sale were nearly 30% of the inventory, while units still under construction represented 54% of the inventory and units for-sale that were permitted but not yet started represented more than 16%.
While completed units as a share of total homes for sale have been on the rise, the median length of time that a completed home was on the market in October was 3.8 months, down from four months a year earlier.
Sales of new single-family homes edged down during the month by 3.2%, reaching a seasonally adjusted annual rate of 1.004 million units, which was about the average pace for this year’s third quarter.
“The new-home sales report by the government is in line with what builders have been reporting from the field for several months, that the market correction in terms of sales is largely behind us and the market is stabilizing,” said NAHB President David Pressly.
To work down the inventory, builders have been aggressively stepping up their marketing efforts to increase the awareness among prospective customers of the continuation of relatively low mortgage rates and overall market conditions that give an edge to buyers over sellers.
Pressly said that NAHB surveys are showing that nearly half of the builders are now trimming prices and most are offering non-price sales incentives. “These efforts have helped,” he said.
Market Fundamentals in Place for a Sales Lift
“A variety of market measures indicate that home sales now are stabilizing following a substantial correction from the unsustainable highs reached last year,” said David Seiders, NAHB’s chief economist. “Aggressive sales efforts by builders, combined with historically low mortgage interest rates and solid growth in employment and household income, have buoyed housing affordability in recent months.”
Existing home sales held steady in October, the National Association of Realtors® (NAR) said last week, with a 0.5% rise to a seasonally adjusted annual rate of 6.24 million units from an upwardly revised pace of 6.21 million in September. Sales were 11.5% below the 7.05-million pace of a year earlier.
“The present level of home sales demonstrates some confidence in the market,” said David Lereah, NAR’s chief economist, “but sales are lower than sustainable due to psychological factors.”
Lereah said that the market fundamentals — including household growth — are in place to support more robust sales activity, “but many buyers remain on the sidelines. After a period of price adjustment, we’ll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007.”
The inventory of resale homes was up 1.9% in October to 3.85 million, a 7.4-month supply at the current sales pace.
Mortgage Rates Drift Lower
Long-term mortgage rates edged down for the fifth consecutive week last week, according to Freddie Mac's Primary Mortgage Market Survey. The 30-year, fixed-rate mortgage averaged 6.14%, down from 6.26% for the same week in 2005. The rate was the lowest since the week ending Jan. 26, when it averaged 6.12%.
Frank Nothaft, Freddie Mac’s chief economist, noted that mortgage applications for home purchases in November remained healthy, “due largely because of the drop in mortgage rates and a softening in home prices in some areas.”
The week before last, two-thirds of the 49 economists responding to a Wall Street Journal forecasting survey predicted that the worst of the housing slump is over.
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