Absolute new home inventory is at very low levels:
The savings rate is high -- people are tucking away more of their paycheck.
The financial services obligation ratio is decreasing, indicating consumers have more room for debt payments.
Mortgage rates are incredibly low.
Prices are becoming compelling.
Sales of new homes are currently at low levels. However, suppose we start to see good job creation for a period of 3-4 months; that is job creation in the 150,000-200,000 range. Or, more generally, we see enough job growth to increase confidence so people start buying houses again.
Two questions:
To what degree are existing homes and new homes substitute goods -- that is, to what extent will people who wanted a new home buy a lower priced existing home?
Is this enough of a bump to demand for home builders to ramp up production again?
5 comments:
Bonddad, wish it were that easy but it’s not. The driver for new homes construction is not price or mortgage rate but employment – so until jobs increase, new homes won’t. A real chicken and egg that needs a sharp external stimulus to change slope and direction. In addition, negative equity now will impair some additional housing demand. Only two things improve this picture: time or money that creates jobs.
Existing home inventory is currently at all times highs when shadow inventory is included. So why should new home builders start constructing spec homes again, especially when there is no job creation?
Mortgage rates are incredibly low but they have spiked over the last few days. I refinanced last week at 4.125% but today I could have refinanced at only 4.75%. That is a big move up in a very short period of time.
As for the financial obligation ratio, the graph doesn't take into account income inequality. Since inequality has widened dramatically over the past two years, upper income folks have seen their incomes increase and debts decrease in comparison. Though lower income folks have frequently lost their jobs or have had their wages or hours cut, and they've often been unable to refinance their loans, thus their financial obligation ratio has went up in a large number of cases. Those that have wiped away debt via foreclosure and bankruptcy; however, they have bad credit and won't be able to buy a new home for a long time. The bottom line is that this graph is not nearly as simplistic as the author seems to believe.
Sellers still need to find buyers. Many who were potential buyers before may not receive credit now. I don't see things dramatically improving in housing until someone, somehow identifies a large group of potential buyers.
bonddad, care to explore further this http://minerals.usgs.gov/minerals/pubs/commodity/stone_crushed/
yep for 2010 it is a survey but this thing is the basic ingredient for new construction?
The latest jobs bill coming out of Washington isn't really a bill at all. It's the Fed's attempt to keep long-term interest rates low by pumping even more money into the economy ("quantitative easing" in Fed-speak).
The idea is to buy up lots of Treasury bills and other long-term debt to reduce long-term interest rates. It's assumed that low long-term rates will push more businesses to expand capacity and hire workers; push the dollar downward and make American exports more competitive and therefore generate more jobs; and allow more Americans to refinance their homes at low rates, thereby giving them more cash to spend and thereby stimulate more jobs.
Problem is, it won't work. Businesses won't expand capacity and jobs because there aren't enough consumers to buy additional goods and services.
The dollar's drop won't spur more exports. It will fuel more competitive devaluations by other nations determined not to lose export shares to the US and thereby drive up their own unemployment.
And middle-class and working-class Americans won't be able to refinance their homes at low rates because banks are now under strict lending standards. They won't lend to families whose overall incomes have dropped, whose debts have risen, or who owe more on their homes than the homes are worth -- that is, most families.
So where will the easy money go? Into another stock-market bubble.
It's already started. Stocks are up even though the rest of the economy is still down because of money is already so cheap. Bondholders (who can't get much of any return from their loans) are shifting their portfolios into stocks. Companies are buying back more shares of their own stock. And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.
When our elected representatives can't and won't come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble. And we know what happens when financial bubbles get too big.
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