Home Sales are Inching Higher

I like reading the paper, but not for enlightenment… I read it for entertainment.

Most of what I read on business and economics is so woefully stupid as to be humorous. Unfortunately, there is almost always at least one story line that is so wrong-headed as to be infuriating. Right now that story is housing, or more specifically, the housing recovery.

Of course home sales are inching higher and inventory is shrinking. How could this not be so? The Federal Reserve is crushing savers in order to keep mortgage rates at historic lows under 4%!

Banks are sitting on more than a million homes that have been foreclosed, but are not putting this inventory on the market. Given that banks do not have to fairly value their assets when tabulating their balance sheets, this is not a problem for them in the short-term.

In addition, there are millions more homes that are delinquent more than 90 days but are NOT being foreclosed because banks don’t want them.

All the while, home building came to a virtual standstill. And yet our population continues to grow.

Home sales have stabilized a bit, and might even perk up in price a little bit as well. But does this mean we are at the beginning of a wonderful move up?

Don’t bet on it.

More specifically, don’t invest for it!

We have to recognize that a housing recovery, at least one that will drive the economy in terms of GDP and employment growth, has to be centered on new home sales. While trading existing homes around makes some dough for realtors and title companies, it doesn’t provide the leveraged boost to the economy that borrowing 80% of the purchase price for a newly constructed home does.

The existing home, by definition, exists. It doesn’t require carpenters, roofers, electricians, plumbers, etc. Yes, there is the notion of increasing equity as prices rise, but that is dormant wealth unless someone borrows against it to spend on other stuff. This cannot compare to the economic effect of new construction.

With this in mind, the great news is that new home sales have soared in the last year, moving from a low of 306,000 units per year to near 400,000 units per year in 2012.

Unfortunately, this has to be contrasted with new home sales at the top of the market in the mid-2000s, when our economy was creating over one million new homes a year.

In fact, at 400,000 units per year, we are still below every single year of new home sales since the measure was created over 40 years ago! In 1982, when mortgage rates were in double digits and the economy was mired in a recession, our economy still created 412,000 new homes.

So how would we get back to a level of home construction that would significantly boost the economy?

Well, we would have to see potential new home buyers enter the market in droves. These buyers would need the savings required for a down payment. They would need the credit score and other attributes necessary to obtain a loan. And they would need the desire to buy a home.

How many people fit these criteria?

From our view point, not many… at least not many more.

As our economy drags on in anemic-growth mode, consumers are not building their savings at a rapid pace and they want to stay flexible. This should serve to hold back new home sales in the months and even years ahead.

Which brings up the home builders…

Over the past year, several home builders have zoomed higher in stock price. They are benefiting from surviving in a shrinking market. They shrank their capacity to meet demand and are still around to build homes, albeit fewer homes.

But the future for these builders is fraught with danger. This is a good arena to avoid.

Rodney

 

 

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.