From Roger on the fool
Sales of new homes declined in June and July, and more new homes are on the market. Building permits and housing starts are still high, but the supply of vacant homes continues to grow. Eventually an oversupply of homes should lead to a reduction in the number of homes under construction. With the housing sector being responsible for almost all of the country's economic growth over the past year, predicting the next recession may depend on answering the question: Has the Housing Sector Peaked?
There has been a dramatic shift toward home ownership among the populace over the past year. Has the demand for new housing been artificially high, as the country has shifted from renting to owning? If so, the mere stabilizing of demand should lead to a slowdown in the sector, and a drop in demand should cause a big slowdown. A drop in the rate of home ownership could come as a result of rising rates, tighter lending practices or increased defaults.
At the end of July, the census bureau published a report on housing vacancies and home ownership for Q2 2004: census.gov
In it, I found some interesting stats.
1. Rental vacancies have risen from just under 8% in 2000 to over 10% in 2004.
2. The number of vacant homes rose by 768,000 over the year ending in Q2 2004, a rise of over 5%.
3. Percentage of home ownership made a rapid rise from 68.1% to 69.3% over the past year (seasonally adjusted), after averaging closer to 65% for most of the past 3 decades.
Demand does appear to have peaked, based on new home sales:
census.gov
March - 1270
April - 1176
May -1283
June - 1211
July - 1134
I'm specifically not looking at existing home sales or mortgage activity because they are more dependent on interest rates than the overall supply and demand story, but they are both down as well. Low interest rates make home ownership at high prices possible for a greater number of people, but a collapse in the price of houses due to supply and demand factors would also make home ownership easier (just not as fashionable).
Builders keep on building near record levels, however, so the pileup of vacant homes will likely get worse before it gets better. However housing starts have been lower than building permits over the past 4 months, while the totals were pretty much even over those months a year ago. It suggests to me that builders may be holding back a little on construction because demand may be lacking.
Year.............2004..........2003
Mar Starts - 2011..........1748
Mar Permits - 1946.......1688
Apr Starts - 1981..........1632
Apr Permits - 2006.......1708
May Starts - 1970.........1738
May Permits - 2097......1803
June Starts - 1826........1845
June Permits - 1924.....1823
July Starts - 1978.........1892
July Permits - 2055......1800
So, July starts surged just as sales declined. It will be interesting to see what effect this has on the market when those homes get built.
There is also a large supply of lots ready for construction. Of the new homes that were sold during July, only 24% were completed. 40% hadn't been started yet. The number of new homes for sale rose by 13,000, but 11,000 of that was from homes not yet started. There may be a rush by builders to get homes and lots on the market before the public catches on that the housing sector has peaked and prices begin to decline. |
