New home sales data from the Commerce Department out yesterday signaled more evidence the housing market is on the mend. While the numbers are far from overwhelming, they none the less portend to better times ahead. In fact it’s the inventory story that is leading the market’s move towards stability.
I know I keep sounding the recovery drum here, but the recent revelations about continued declines in new home construction permits and reports of tight inventories across a broad swath of markets, leave little doubt that something positive is a foot. How positive? I’m not yet sure, but good news is welcome news I say. Admittedly, I remain an island in a sea of disbelievers and naysayers.
Yet, consider this: I listed a home yesterday at a very competitive price and I’ve already been told after just one showing, to expect an offer immediately. The price the seller is asking is 5-7% above recent comps, but there are similar homes on the market asking 5-10% more than us. So are we low, or are they high? Obviously I believe, and have counseled my clients, that we are correct and the others are too high. Our strategy of aggressive pricing will help us to sell quickly which is one of the seller’s stated goals. It also supports the point I have been making, that inventory is very low and buyers a plenty — provided the home is priced correctly. But there’s more: this family is moving across the country to Cincinnati, OH, and when I asked about the market in the suburb they are looking at, they informed me, there aren’t many homes on the market. Let me pause to make this point: supply matters.
The threat of a flood of distressed properties has convinced would be buyers and the media that the housing market is nowhere near a bottom. That 2012 is going to be ugly and a double dip in housing not only likely but inevitable. While my crystal ball is no better than anyone else’s, I just don’t see it. Maybe I’m wrong or maybe I just enjoy being contrarian, but last time I checked, all goods and services exchange hands at a rate and price relative to the available supply when weighed against consumer demand.
In economics and specifically in our housing market today, we have the perception of an excess supply, but a reality that is really quite different. So while external forces like tough lending practices and constant negative media, focus buyer attention on reasons not to buy, their personal observations as they attempt to purchase, are in conflict because their perception is not in sync with the reality they are finding. Buyers are experiencing supply constraint not supply excess. The constraint on supply has been caused by an extended period of reduced new construction and by a lack of home sellers with homes priced to sell. The Commerce Department data yesterday, suggests to me that buyers are turning to new homes because there is insufficient supply in used homes. Conventional thinking is that competition to new homes from distressed properties in the same neighborhoods, makes selling new homes too challenging: builders can not compete with foreclosures, which is true. This is why the number of new homes under construction is down and newly issued permits down even further. Yet the data also puts the current supply at about 6 months, down from 13% months in April 2009. As demand continues to strengthen with an improving economy, tight supplies of quality homes, will at some point, manifest in pricing pressure.
So although distressed properties will keep pricing pressure at bay for the foreseeable future, it is only a matter of time before the basic economic tenet of supply and demand takes this market into familiar territory where home prices are stable, demand steady and the sound of hammers and saws from the construction industry once again are the engine that drives our economy.
Published on 2011-05-25 07:00:58