Thursday, July 30, 2009

Housing Is Jostled, But on Road to Recovery

Excerpted from NAHB:

In the final estimate of real (inflation-adjusted) growth in gross domestic product (GDP) for the first quarter of 2009 by the Bureau of Economic Analysis, GDP fell 5.5% at a seasonally adjusted, annual rate. This decline was less than the bureau’s preliminary estimate of a 5.7% drop.

Back-to-back, substantially negative quarters are certainly painful indicators of an economy in a sharp recession. Nonetheless, the trend indicates that the worst is over, that the decline is slowing and that we will see growth re-emerge.

NAHB estimates that the just completed second quarter of 2009 resulted in a 1.2% decline in real GDP. Looking forward, we expect the economy to expand at an average annual rate of 1.5% in the second half of 2009.

To date, a relatively small amount of the first stimulus package has been spent. Approximately $90 billion of the $789 billion package, or 11%, had gone into the economy by the end of June, and more of that money is expected to flow into the economy as summer road projects ramp up.

By the end of the year, about $250 billion should be injected into the economy. Typically, it takes six to nine months for the effects of government spending and tax cuts to spread throughout the economy.

The housing market is clearly negotiating the roughest road of this recession/recovery. All the month-to-month volatility makes one nervous about declaring a bottom in the market. However, the crucial first step to recovery in the housing market — stabilization of demand — appears to have occurred.

Single-family existing home sales, which averaged 4.1 million in the first quarter of this year, averaged 4.2 million for April and May. May’s reading of 4.25 million single-family sales at a seasonally adjusted, annual rate was the highest rate since October of last year. While many of these sales are foreclosed homes and short sales, clearing out the inventory of foreclosed homes is necessary.

New home sales seem to be struggling more, but they are slowly improving. First quarter sales averaged 339,000. April and May averaged 343,000 — a small but definite improvement.

Clearly, competition from foreclosed homes, wariness among potential home buyers, recession fallout, stiff lending standards and overly conservative — and in some cases, undervalued — appraisals are all acting as a drag on the new home market.

Nonetheless, builders are successfully paring their inventory of new homes. At of the end of May, builders had 292,000 houses for sale. This is down from peak inventory of 572,000 at the end of July 2006 and 453,000 from May 2008.

If builders continue to reduce their inventory, as seems likely, and sales advance, the months’ supply will fall towards a more normal level. As it is, months’ supply is down from an all-time high of 12.4 months in January of this year, a result of reduced inventory and a higher sales rate.

More and more communities outside of these areas (and even some in these areas) will see prices stabilize and, in some cases, move higher.

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CoachingByPeter July 30, 2009 at 10:10 PM  

Every investment has risks and drawbacks. The important thing is to recognize them, to be aware of what can happen to your investments, and to make sure you aren't exposed to risks you can't afford.