Home Buying at Record Low: Is a Reversal Coming?
Posted on June 30, 2010
As I’ve noted in the past, Markets obey a basic rule: they reverse after extremes. The basic reason for this is that extremes demand action from various interested parties, which ignites a major shift/change in the Market that ultimately changes fundamentals, pricing and the supply/demand picture. So I was pleasantly surprised to read today that home buying is now at a 13-year low.
The Mortgage Bankers Association noted that:
“Sales of new homes plunged nearly 33 percent in May, however, to the lowest since record keeping began in the early 1960s and existing home sales unexpectedly fell 2.2 percent. A double-dip recession is a growing concern.”
So is the lowest new home sales on record a sign that a reversal is near?
Of course, I don’t have a clue as to the timing (note: I’m taking a beating on my recent ZIPR investment), but my guess is that residential real estate after years of decline is finally facing a major extreme and will reverse. It’s nearly impossible to imagine that a change will occur when extremes and pessimism reign supreme, but there always is a change and reversal at some point. My guess is something radical, albeit rational, will be implemented soon to maintain a “floor” in real estate. Undoubtedly, on a more immediate basis, the homebuyer tax credit will be extended and renewed.
It’s also interesting to note, that in general, humans are followers as opposed to leaders. This is why nearly everyone sells at the bottom and buys at the top. So when significant social trends, that still represent value, reach a record low, the odds are high that a bottom has been reached.
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Dear Dear Dear Yehuda,
This is the only ray of hope that I have seen on this very painful situation. I have been a speculative and contract home builder since the 1970’s but have not seen a reason to build speculatively since 2007 when the existing housing stock started to sell for less than replacement cost. Today, the only buyers for new homes are those that want a new home no matter the cost. The new home buyers are like those who would rather buy a new car rather than a used car for the obvious reasons or those who buy luxury models versus standard models because they simply can afford to spend the extra money without worry.
New household formation because of population growth should eventually cause the swing from the 300K new homes per year that we are currently producing to the 1.3M that we need theoretically to keep up with population growth.
Thanks for the ray of hope.
Thomas
PS if you are thinking of building a new home or renovating an older home, let me assist you with the process. Gotothomas@aol.com
Hi Thomas,
Something will need to be done soon since we are inching towards an imminent crisis, assuming the numbers are accurate. I continue to have hope that the fools running our economic policy in Washington will soon wake up and recognize that the economy doesn’t just reside in a few streets in New York City. What I think needs to happen is a government-forced plan for wholesale debt forgiveness for residential real estate. You simply can’t have a functioning economy when nearly everyone who bought a house in the last six years or so, is now underwater. Of course, debt forgiveness will entail major pain for banks, but there’s no way around it.
Here’s a good recent article on current policy:
http://www.newdeal20.org/wp-content/uploads/2010/06/deficitcommissionrv.pdf
Here is a good quote from this paper:
“To cure the financial crisis would require…debt restructuring for the entire household sector…and…reconstruction of the banking system…”