Interest Rate Roundup

Wednesday, December 06, 2006

A bounce vs. "The Bottom"

The Mortgage Bankers Association's home purchase application has spiked higher in the past couple of weeks. Mortgage rates have been falling for a while, but initially, this index did not respond. That has obviously changed. The reading of 426.60 for the most recent week is up from a low the week of 10/27 at 375.60. Luxury home builder Toll Brothers also talked yesterday about how some markets appeared to be bottoming. And I believe November was clearly a better month for sales than Sept. or Oct. (seasonally speaking).

But the key question is this: Is this just a bounce or (drum roll please) "THE BOTTOM?" I'm skeptical of the latter. The fact is, we've had a 15-year uptrend in residential real estate off the 1991 recession low. There were minor hiccups in 1994/95 and then 1999/2000, to be sure, but they weren't big. Then beginning in 2001, everything went nuts. This culminated in the biggest housing bubble in U.S. history, which topped out last summer. I find it EXTREMELY hard to accept that this can all unwind in about 12-15 months, and that it'll all be wine and roses from here.

Some other things to consider ...

- Yes, sales are rising. But many of those sales are being "bought" with extremely aggressive incentives. One builder down here is offering up to 37% off the previous list price on some homes, and allowing buyers to "move in for $1." Another trumpeted how its Oct./Nov. sales surged from the previous two months due to a "Home-A-Palooza" promotion. That’s true ... but only because the builder cut prices so much, the average value of those orders dropped 33%.

- Builders and individual home sellers will likely have to cope with the "GM problem." Home buyers are being conditioned to expect big deals, just like car buyers were taught in the post-9/11 incentive frenzy. Will they still buy if those discounts go away? My bet is that builders will try to pull back, but that will spook buyers, and they'll have to resort to discounts, freebies, and price cuts again.

- Pundits are underestimating the magnitude of the supply glut we have right now ...

The supply of new homes for sale shot up about 96% from its 2001 low through the July 2006 peak (292,000 in 3/01 vs. 573,000 in 7/06). That was the highest in U.S. history. Since then, despite all the hoopla about how inventories are coming down, we’ve dropped just 2.6% to 558,000.

The supply of existing single-family homes for sale rose 108% from its 2001 low to its July high (1.59 million in 1/01 vs. 3.31 million in 7/06), also a record high. Since then, we’ve dropped just 0.6% to 3.29 million units. And that's during a time of year (the pre-holiday/holiday season) when inventories almost always stagnate or decline. What do you think is going to happen when all those sellers who pulled their houses from the market for the holiday season re-list? Inventories will shoot higher again, most likely beginning in January or February.

- Existing single-family home prices dropped the most on record in October (3.4%). New home prices dropped more than 9% in September, though the government says they bounced back a bit in October. I believe prices will need to fall further to clear all this inventory, and that the housing market will remain weak through at least 2008.

That's my latest thinking, anyway. Feel free to accept or reject as you see fit!


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