Interesting Rd: Has the Housing Market Hit Bottom?
Bloomberg reports: The market has been in free fall for some time now, with the subprime scare roiling bond and equity markets in a way that has not been seen since the Asian financial crisis of a decade ago.
Amid all the doom and gloom, it's easy to forget that all such declines eventually end. There has been a lot of bad news lately, but the good news is this: The housing market may be getting close to a turnaround.
Last week, we learned that new home sales rose 2.8 percent in July, and the inventory of unsold homes fell to 7.5 months. Credit concerns are making mortgages harder to get, though the numbers indicate that enough well-qualified buyers have decided to stop sitting on the sidelines to give the market a boost.
Back in the fourth quarter of 2005, household investment in new homes and repairs peaked at an annual rate of $711.8 billion in 2006 dollars, according to Federal Reserve data. By the first quarter of this year, it had dropped to $549.3 billion in 2006 dollars.
That 23 percent decrease is enormous relative to declines that have occurred in the past, even during economic slumps. In the recession of 1990-1991, residential investment dropped about 10 percent. During the worst housing recession, in 1980, the decline was only 17 percent. Residential investment actually increased during the last recession.
If society needs 100 million homes but finds itself with 103 million, new construction drops precipitously.
The extra 3 million homes aren't destroyed, however. Instead, homeowners will sit back and let the natural wear and tear of depreciation work its wonders, until only 100 million homes are left.
Outside of recessions, the per capita growth of housing has been 1.1 percent since 1952, according to Federal Reserve statistics. During recessions, it drops not to zero, but to an average level of about 0.8 percent.
The latest Fed data suggest that investment may have dropped enough to have reached a reasonable retrenchment point.
Relying on an old government number -- that housing capital ``decays' at a rate of about 1.1 percent per year -- and adjusting for population growth, then the numbers suggest that the existing stock of residential real estate is growing at a rate of about 0.3 percent per year.
That growth is about 1 percentage point below where it was in 2005, and about half a point below the average level experienced in postwar U.S. recessions.
It's likely, however, that housing capital decays a bit faster than that. If so, then the stock of housing in the U.S. isn't growing at all, and may even be shrinking. That is exactly the measured response to an overhang that economics would predict.
Full Story: bloomberg.com |
