jbernal
Madmaxista
- Desde
- 7 Nov 2006
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Wobbling, not collapsing
WOE unto the housing market. That is what many economists have been preaching for over a year. American housing prices have long marched upwards at a remarkable pace, particularly in coastal cities where the growth in home prices has far outstripped the growth in incomes. So many analysts have been waiting for a sharp change of course. Now even those selling the houses, such as David Lereah, the chief economist for the National Association of Realtors, are conceding that prices may have to drop.
Indeed, the consensus is that the long-awaited slackening has probably already begun, although—so far—the change has been less dramatic than some commentators had antiestéticared. The evidence is mixed: demand for existing homes seems to be diverging from demand for new construction, and there is considerable fluctuation in prices and demand.
New data released this week indicate, again, that qualified gloom about the housing market is warranted. They show that October sales of new homes dropped to a seasonally adjusted annual rate of 1m, down by 3.2% compared with the month before. The supply of houses on the market is going up. According to the Census Bureau and the Department of Housing and Urban Development, who released the data, there are now enough new homes in the pipeline to satisfy seven months of demand. And though prices rose slightly in nominal terms, adjust for inflation and prices actually fell a bit. If you believe anecdotal reports, real prices have probably fallen rather more. Developers are said, increasingly, to be using non-cash incentives such as upgraded fixtures to keep up prices. If so, the high nominal prices actually hide fairly deep discounting. That suggests the new housing market is getting weaker, but not weak enough to force stubborn sellers to cut prices.
But data on sales of existing homes show a somewhat different picture. Prices fell 3.5% in October from a year ago, but sales rose slightly. Quarterly data may also show a slight decline in prices. Perhaps private sellers are more willing than hard-nosed businessmen to cut prices (nominal ones). Though perhaps they are not willing enough: inventories of existing homes also rose, giving the nation a 7.4 month supply.
Even for those who have not invested in a Maryland McMansion or a San Francisco pied-a-terre, there are reasons to worry about these trends. Residential fixed investment is a significant component of gross domestic product, and in recent quarters it has gone from a growth booster to a drag. And the drag is increasing; thanks to those rising inventories, construction spending fell by 1% in October, the biggest drop since September 2001. Unsurprisingly, stocks fell on the news. The other reason to be worried is the wealth effect: first rising stock prices, then rising home values, made Americans feel wealthier. That spurred consumption, and the production to meet it. The largest asset most Americans own is their home; if they start feeling bearish on their home equity, they are likely to pull back in other areas.
Is this happening? Declining consumer confidence, and softer-than-expected November retail sales, seem to point that way. But here, too, there is a little less than meets the eye. This week America’s Bureau of Economic Analysis (BEA) published its preliminary revisions for third quarter GDP, earlier estimated at an extremely disappointing 1.6%. Economists had been expecting a slight revision upwards, probably to 1.8%. Instead, the BEA reported that it now thinks the economy grew by 2.2% in the third quarter. That is perhaps not as hot as the searing pace of yesteryear, but it is robust enough to bring a smile to the face of most developed-world central bankers. This may explain why Ben Bernanke, the chairman of the Federal Reserve, has been sounding so bullish lately.
Ironically, his good cheer may not be good news for the housing market. Mr Bernanke may not lower interest rates as quickly as some analysts have speculated, keeping the price of mortgages high.
But this is not necessarily bad news for everyone. The uncertainty about coastal housing markets may be fuelling a small investment boom in places like Buffalo, a rustbelt city in western New York state where lovely old Victorian buildings can be had for a song. Like many of the old manufacturing cities in the region, property taxes are high. These insulate the market somewhat from interest rate swings (rather as high energy taxes make Europeans less sensitive to OPEC’s machinations). For some, the coastal loss may be their gain.
And it may be too soon to declare the boom over. Markets may pick up again. Some look to Britain, which had an even bubblier housing boom that apparently was set to go bust some time ago, yet the housing market seems to be alive and well. According to Nationwide, a building society, an investor who bought an “average” house in October of 2005 would have seen a gain of 8% in the past year or so.
WOE unto the housing market. That is what many economists have been preaching for over a year. American housing prices have long marched upwards at a remarkable pace, particularly in coastal cities where the growth in home prices has far outstripped the growth in incomes. So many analysts have been waiting for a sharp change of course. Now even those selling the houses, such as David Lereah, the chief economist for the National Association of Realtors, are conceding that prices may have to drop.
Indeed, the consensus is that the long-awaited slackening has probably already begun, although—so far—the change has been less dramatic than some commentators had antiestéticared. The evidence is mixed: demand for existing homes seems to be diverging from demand for new construction, and there is considerable fluctuation in prices and demand.
New data released this week indicate, again, that qualified gloom about the housing market is warranted. They show that October sales of new homes dropped to a seasonally adjusted annual rate of 1m, down by 3.2% compared with the month before. The supply of houses on the market is going up. According to the Census Bureau and the Department of Housing and Urban Development, who released the data, there are now enough new homes in the pipeline to satisfy seven months of demand. And though prices rose slightly in nominal terms, adjust for inflation and prices actually fell a bit. If you believe anecdotal reports, real prices have probably fallen rather more. Developers are said, increasingly, to be using non-cash incentives such as upgraded fixtures to keep up prices. If so, the high nominal prices actually hide fairly deep discounting. That suggests the new housing market is getting weaker, but not weak enough to force stubborn sellers to cut prices.
But data on sales of existing homes show a somewhat different picture. Prices fell 3.5% in October from a year ago, but sales rose slightly. Quarterly data may also show a slight decline in prices. Perhaps private sellers are more willing than hard-nosed businessmen to cut prices (nominal ones). Though perhaps they are not willing enough: inventories of existing homes also rose, giving the nation a 7.4 month supply.
Even for those who have not invested in a Maryland McMansion or a San Francisco pied-a-terre, there are reasons to worry about these trends. Residential fixed investment is a significant component of gross domestic product, and in recent quarters it has gone from a growth booster to a drag. And the drag is increasing; thanks to those rising inventories, construction spending fell by 1% in October, the biggest drop since September 2001. Unsurprisingly, stocks fell on the news. The other reason to be worried is the wealth effect: first rising stock prices, then rising home values, made Americans feel wealthier. That spurred consumption, and the production to meet it. The largest asset most Americans own is their home; if they start feeling bearish on their home equity, they are likely to pull back in other areas.
Is this happening? Declining consumer confidence, and softer-than-expected November retail sales, seem to point that way. But here, too, there is a little less than meets the eye. This week America’s Bureau of Economic Analysis (BEA) published its preliminary revisions for third quarter GDP, earlier estimated at an extremely disappointing 1.6%. Economists had been expecting a slight revision upwards, probably to 1.8%. Instead, the BEA reported that it now thinks the economy grew by 2.2% in the third quarter. That is perhaps not as hot as the searing pace of yesteryear, but it is robust enough to bring a smile to the face of most developed-world central bankers. This may explain why Ben Bernanke, the chairman of the Federal Reserve, has been sounding so bullish lately.
Ironically, his good cheer may not be good news for the housing market. Mr Bernanke may not lower interest rates as quickly as some analysts have speculated, keeping the price of mortgages high.
But this is not necessarily bad news for everyone. The uncertainty about coastal housing markets may be fuelling a small investment boom in places like Buffalo, a rustbelt city in western New York state where lovely old Victorian buildings can be had for a song. Like many of the old manufacturing cities in the region, property taxes are high. These insulate the market somewhat from interest rate swings (rather as high energy taxes make Europeans less sensitive to OPEC’s machinations). For some, the coastal loss may be their gain.
And it may be too soon to declare the boom over. Markets may pick up again. Some look to Britain, which had an even bubblier housing boom that apparently was set to go bust some time ago, yet the housing market seems to be alive and well. According to Nationwide, a building society, an investor who bought an “average” house in October of 2005 would have seen a gain of 8% in the past year or so.
