The Road Ahead for Housing

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The Road Ahead for Housing

Beginning in 2006 and continuing to the present, the housing market has experienced a cataclysmic meltdown as massive as the collapse of the "tech bubble," but far more pervasive.  You already know a lot about that.  The questions now are:  Where do we stand?  What lies ahead?  What broader demographic, economic, and attitudinal factors are likely to determine housing's future?  What does this mean for you? 

Whether you're looking at new or existing homes, both prices and unit volumes have declined sharply since the peak in 2006.  Foreclosed homes and empty subdivisions litter the landscape.  In short, the housing market is in shambles.  However, there is plenty of reason to believe that U.S. housing has reached the bottom and is in a position to recover.  

Why do we say that?  First, new home sales were stronger than the consensus expected in March, at 356,000, and this is consistent with the view that both new and existing home sales bottomed in the first quarter and are likely to rise over the next couple of years.1 

Inventories are also going in the right direction.  The total inventory of unsold new homes fell 16,000 in March, to 308,000.  This is well within the normal range before the housing boom started in 1997 and down 46 percent from the peak in 2006.  The reduction in inventories is going to continue.  Recently, builders have been starting single-family homes at about a 360,000 annual rate, of which only about 210,000 needs to be sold because the future occupants already own the rest.  This is well below the current annualized rate of new home sales, which is 356,000; and this is consistent with the view that housing starts have also hit bottom. 

Notably, home prices have gone up in 16 of the 20 markets surveyed for the February S&P/Case-Shiller Home Price Index,2 while the hardest-hit areas, such as California and Florida, have started to recover as the decline of prices is slowing.

Expect further downward pressure on home prices as builders reduce the inventory of completed new homes and as banks sell off foreclosed properties.  However, most of this downward price pressure will be in five states:  California, Florida, Arizona, Nevada, and Michigan.  Other areas of the country are near or already at the bottom for home prices. 

Similarly, the National Association of Realtors3 reports that its seasonally adjusted index of pending sales for existing homes rose 3...

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