End of Year 2008 Housing Update

Housing Starts

Housing starts for November fell 18.9% from a year ago to an annual rate of 625,000 homes. This is very significant. First, let me explain how low this number really is. This is the lowest housing starts numbers since the government started tracking this statistic in 1959. The lowest housing start number in the ‘91 housing recession was 798,000. The lowest housing starts number in the 1981 housing recession was 837,000 homes. The average housing starts over the last 30 years has been 1,514,000 homes. So, we are almost 1/3 of the average right now. The current # is even more significant when you consider how many more people we have living in the US than we did 30 years ago. The US Population is 37% higher now than it was 30 years ago. Keep in mind, housing starts represent about 75% new homes and about 25% replacement of old homes (tear downs) and I would argue that as housing starts decline, the % represented by home replacement goes up. So, of the 625,000 housing starts, only about 469,000 represents new homes. These numbers are awful but here’s the good news . . . a low number is good for everyone except for builders. Why? Because, this means that builders are finally making very significant reductions in new home construction, allowing inventory (of existing and new homes) to be sold off. Housing starts are an indication of Builder Sentiment. So, the lower housing starts are, the more desperate builders are . . . the more desperate builders are, the better deals they are willing to give. This is important for any of your prospects looking to buy a new home and I’ll write more on this later. So, that brings us to inventories.

Home Inventory

First, it is important to recognize that new home inventory has been falling steadily from a peak of 572,000 in July, 2006 to 374,000 in November, 2008 (in other words, it has been declining for 2 ½ years!). The media tends to skew public opinion about inventory by focusing only on “Months of Inventory”. Months of Inventory is basically how many months it will take to sell the existing new home inventory at the current new home sales pace. Of course, when the sales pace is at historically low levels, even modest new home inventory will represent a high Months of Inventory number. The average new home inventory over the last 30 years is 350,000 homes so we are only slightly over the average right now at 374,000 homes . . . so obviously, the new home inventory situation isn’t nearly as bad as the media would like you to believe. Even more important is how quickly the Months of Inventory number could drop when the housing market bottoms and sales starts going up. If we get a 25% increase in homes sales along with a 25% decrease in inventory, the Months of Inventory # would drop by 40%. It’s at 11.5 months now so it would drop to 6.9 months. The point is, in most of the past housing rebounds, home sales have increased rapidly off their bottoms and home inventories have dropped rapidly so it is highly likely that during this coming winter/spring, when I expect home sales to pick up, the Months of Inventory # will improve dramatically.

Sales

There’s not much to say about Sales other than they are low and got even lower in November. I expect December to be similar to November if not slightly higher than November. What really hurt sales in November and December was the Policy Makers leaking the information that they may buy mortgage rates down to 4.5%. All this did is put would-be buyers more firmly on the fence as they wait for 4.5% mortgage rates. I expressed my frustration with this at my Philadelphia Fed Meeting on December 9^th to Charles Plosser, the President of the Philly Fed and a member of the FOMC Committee. I don’t think the Fed realized how damaging this information leak was to sales. Regardless, I believe the low interest rates have created some renewed interest in home buying in the latter half of December so my suspicion is that December home sales (seasonally adjusted) will be a little better than November’s. I do expect that we’ll see a significant improvement in Sales this Winter and Spring, regardless of what the economy does. People are going to realize that the waiting game is over and now is the time to buy that home they’ve been putting off for a few years. Also, more importantly, new home buyers will start coming into the market and stop living with their parents and this will help sales across the board because new homes buyers will buy a home from someone who will finally be able to go out and buy the home they want but couldn’t until they sold their existing home. This will play an especially large role in terms of enabling retirees to buy their retirement home (in Sussex County we hope J).

Why Buying a Home in the Next Three Weeks May Prove to be an Extremely Smart Decision

This is the real reason I wanted to blog this information. In my opinion, buying a home between now and January 20^th (Inauguration) will prove to be the best time to buy a home in our lifetime. Here’s why:

So, there’s no doubt that there is pent-up demand out there and that many people have been patiently “waiting for the bottom” for a couple years now. The media reacts to reported housing numbers (sales & price). Sales always pickup before price and in most prior downturns, sales picks up very quickly. And, one month’s sales are reported about 3 ½ weeks after the end of the month so there is a delay between the actual activity and when the data for that activity is reported. Only when the numbers are published will the media report this data and make predictions based upon it. The point is, if you wait for the media to start reporting about a bottom in home sales, you will already be two or three months late and will miss the bottom. However, even more important, if the sales pace returns with a vengeance like it has in most of the past downturns, builders and existing home sellers will not be willing to offer the great discounts and deals they are now. Once it is common knowledge that the market has bottomed, home sellers will feel as if the pressure is off and will be less desperate and thus less willing to agree to huge discounts or incentives . In other words, the best deals are going to be given to the customers that buy prior to the bottom when sales are very slow because once we have the bottom, sales will pickup and sellers will significantly reduce their willingness to offer incredible deals. Also, sales are always slower during the winter so sellers are even more incentivized right now to offer incredible deals.

Here’s another reason to buy a home very soon. The window of opportunity right now to get a great deal is really only about 3 weeks long . . . here’s why: Obama’s inauguration is on January 20^th. Do you think Obama is going to implement an Economic Stimulus Package very shortly after entering the White House? His economic team has already spent numerous hours working on this package so that it is ready immediately upon his inauguration. This is no secret . . . Obama has been very vocal about this. Do you think Obama’s Stimulus Package is going to have a strong Housing Stimulus component to it? You bet . . . it is becoming more and more accepted by economists that to fix the economy, you have to fix housing. So, in other words, on or shortly after January 20^th, we will have a package in place to seriously kick start housing. Now, ask yourself this . . . once the package is announced and home sellers (Builders & Existing Home Sellers) know that Obama has taken steps to significantly increase demand in housing, what do you think will happen to their willingness to offer incredible deals? I can tell you . . . it will significantly decline. Why would they offer a great deal when they know that they no longer need to since the housing stimulus is going to be all the incentive buyers need? The basic point is this . . . the window of opportunity for would-be home buyers to be offered a special extra incentive or significant discount is only open for 3 more weeks. When Obama takes office, he is going to move quickly and aggressively to fix housing. Once he does this . . . even before we see the results, just knowing what he is going to do will take the pressure off housing and make the market a little less favorable to buyers. Here’s the other good news . . . for buyers who contract before January 20^th but settle after January 20^th, they will very likely be able to benefit from whatever stimulus Obama implements (low rates, tax rebates, etc). So, buying over the next three weeks is a “Two-fer” . . . you get the great discounts associated with the challenging housing market and you’ll most likely also be able to capitalize on whatever incentives are included in Obama’s package.

In fact, you can take this argument even further for new home buyers . . . Obama’s stimulus package is likely to be temporary because only a temporary housing stimulus will create the desired urgency and housing demand. So, Obama may do something like lowering conforming interest rates to 4.5% for 6 months only. If he does this, any new Home Buyer who waits until the package is announced may not benefit from this if their house cannot be built fast enough to settle within 6 months. New Home Buyers who buy now increase their chances of capitalizing on any temporary housing incentives in Obama’s stimulus package.

Anyway, hopefully this all makes sense. I really believe that the peak of home sellers willingness to offer huge discounts or incentives is right now. Waiting until Obama’s Inauguration to see what he’s going to do seems like a logical approach for would-be home buyers but I think it will prove to be a mistake since the certainty of knowing the specifics of his housing stimulus will make home sellers feel more secure and less willing to offer great deals.