Notes from Jim Haughey

Reed Construction Data Chief Economist Jim Haughey discusses how current developments in construction markets and the ecomony will bring opportunities and challenges for designers, contractors, and materials and services providers. His reports will cover near-term building demand, cost and financing changes, and will provide early notice on changes in the detailed two-year construction forecasts elsewhere on this site. Feedback and questions from readers are encouraged.

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Notes from Jim Haughey

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Thursday, August 2, 2007

Existing Home Sales Report Positive for Housing Starts

There were two tidbits of good news for homebuilders and their suppliers in the June report on existing home sales even though the annual sales pace fell from 5.98 to 5.75 million. The report from the National Association of Realtors showed that home prices rose from recent months and were about the same as a year ago and that the inventory of existing homes for sale fell 182,000 units after rising 928,000 units in the previous five months.

Both of these changes are necessary conditions for housing starts to rebound. Home prices are critical because many prospective homebuyers are waiting for home prices to hit bottom and signal that is OK to buy a house without paying too much. A return to stable or rising prices would also boost sales by making housing assets more liquid — sales could be completed faster with more certainty about the price. June’s report is a start in the right direction but it will take several more months of price increases to confirm that the bottom of the price cycle has passed. That may be more than few months away but each positive price report brings it closer.

The June change in inventory was more dramatic. Months of inventory held at 8.8 months (May was initially reported at 8.9 months) even though sales declined. This had to be due to homes being taken off the market without being sold. Some homeowners discovered belatedly that they could meet the monthly payments and did not have to be forced to sell. But the big drop in existing homes for sale was probably expiring sales contracts on homes whose owners hoped to get a big price but failed to get it. Typically, these contracts would have been signed last December soon after homeowners got the news that home prices had peaked.

These two factors overwhelmed additions to existing homes for sale from distressed homeowners when they could not refinance a reset variable rate mortgage into a fixed rate mortgage. It is not yet certain that the inventory of existing homes will continue to decline. Removals from people unable to get a high price from their home will taper off quickly but additions from financially stressed people will keep rising for some time.

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