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An Overhang of New Houses?

Posted by: Peter Coy on December 20, 2005

Just when it looks like housing construction is finally going to cool off we get another number like today’s stat from the government. Construction began in November on 2.12 million privately owned homes (seasonally adjusted). That’s up from 5.3% from October and 17.5% from last November.

And it doesn’t look like this is the end of it, either, because permits are up, too. Permits were issued in November for 2.15 million housing units, which is up from October and from a year earlier.

This is great news for buyers. It means the supply of housing is increasing, which means sellers are going to have to compete harder for your business.

It’s not such great news for homeowners who are looking to sell, or for the builders themselves.

The more bullish analysts are saying that housing still has plenty of room to run. Here’s what Action Economics said about the Census Bureau report this morning:

[T]he U.S. starts report revealed another stellar performance in November …. A housing sector correction will clearly remain a big risk through this business cycle. But, there is no meaningful evidence that this correction will emerge anytime soon.

High Frequency Economics, which is more bearish on housing, called the numbers a surprise but added that construction numbers take a while to respond to changes in the economy:

The bottom line here, though, is that construction activity lags changes in demand; mortgage applications and sales are the key data.

It’s worth pointing out that just yesterday, the National Association of Home Builders came out with a negative report. saying that the confidence of home builders fell again in December from its summer peak. The latest level of the NAHB/Wells Fargo Housing Market Index is 57, down from a June high of 72.

Here’s what David Rosenberg of Merrill Lynch said about the home builders’ survey:

Taking a long view on this index, even at 57 it still remains high, but the downward move from the high of 72 in June cannot be ignored. Within the details the big decline came in prospective buyer traffic, which fell 7pts. This would seem to confirm the concern of many homebuilders who recently cut sales forecasts for next year; little wonder with housing affordability measures deteriorating. The present single family home index fell 4pts which points to some slowing in housing starts for December.

It feels to me like the buyer’s market is flipping over into a seller’s market.

Reader Comments

Peter Coy

December 20, 2005 10:52 AM

This just in from a major bear named Peter Schiff, president of Euro Pacific Capital in Darien, Conn.:

As I have been writing for months, home builders are now in the business of selling shares not houses. To maintain a market for the former they must keep building the later. That is the only logical way to explain building new houses amid a growing glut of unsold inventory. This reckless overbuilding will only exacerbate the magnitude of the price collapse in the coming housing bust.


December 20, 2005 11:19 AM

That's a great comment you added Peter.

I've read that homebuilders are more apt to manage inventory in such a way that they will shut off the flow when demand dries up, limiting any downturn. HA HA HA. The homebuilders are plowing headfirst into the coming bloodbath.

BTW: Enjoyed your "top ten of 2005" article in the current issue of BW.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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