Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (43180)	10/10/2005 10:21:47 AM
From: ild	Read Replies (1) \| Respond to of 110194

Berson's Weekly Commentary Economic Commentary October 10, 2005 Has too much housing been built? One of the items discussed in last week's Economic Commentary was the sharp rise in the inventory of unsold homes, suggesting that the new supply of homes has increased faster than the demand. Alternatively, it was also noted that the inventory-sales ratio was still historically low, suggesting that demand and supply were in better balance. Beyond short-run cyclical factors that affect housing (e.g., interest rates, job and income growth, and alternative investment opportunities), it is demographics that determine the long-run level of housing demand. The change in the number of households gives a rough estimate over time of the demographic demand for housing -- and thus the number of new units that need to be supplied. Looking at household growth over the past 15 years and comparing it with the number of new units supplied, it looks like there may have been too many units supplied over the past couple of years. But are there other factors that would mitigate that result? Housing completions have grown at about twice the rate of new households over the past 15 years (see Figure 1), 46 percent vs. 21 percent, suggesting that new housing supply has increased faster than demand. But this differential didn't begin to occur until the late 1990s -- with household growth (demand) exceeding completions (supply) for much of last decade. Moreover, it has only been in the past couple of years that the differential has become significant. It is a simplification, however, to assert that the number of new units must equal the number of new households. Sometime households demand more than one unit. Specifically, households sometimes purchase (or rent) second homes for vacation purposes -- thereby increasing the total demand for housing units. (And sometimes builders construct too many or too few units, but this can't continue for long). Moreover, unless these units are occupied full-time, they are counted as vacant. The Census Bureau compiles data on these vacant units, determining whether they are vacant only seasonally (mostly vacation homes) or vacant full-time (in which case they could be for sale or for rent, or simply held off the market). There are good reasons to believe that the demand for second homes has been rising over the past decade, given demographic and wealth trends. After very strong gains in the second half of the 1990s (mostly stock market driven), household wealth stagnated for the first three years of this decade -- only to reaccelerate again over the past two years in response to strong home and equity price gains. This rise in household wealth has given consumers the wherewithal to purchase second homes (and it has helped that mortgage rates have been at-or-near 50 year lows in recent years). Perhaps more importantly over the long-term, however, has been the growth in households headed by 45-64 year olds -- the prime age for second home buying. Figure 2 shows that the pace of increase in this cohort has exceeded that of overall households for some time, especially in recent years (note that the annual household data are not yet available by age after 2003). The surge in the number of households in this age group is responsible for a significant increase in housing demand -- and thus in the number of units built in recent years. It probably doesn't explain the entire rise in construction, however, as there has been an especially sharp increase in vacant units for rent over the past few years. Data from Loan Performance have shown that the investor share of purchase mortgages has jumped over the past couple of years, and this corresponds to the period in which the biggest pickup in vacant units for rent occurred. What does all of this mean? Probably that much of the increase in housing demand over the past decade has been demographically driven -- either by increasing numbers of households or second home buying (mostly by baby boomers). But, over the past couple of years housing demand has been augmented by investor purchases to a considerable degree. It is the investor portion of housing demand that is most at risk in coming years, as interest rates climb and other asset classes begin to attract capital. The strong demographic demand for housing should mean that any declines in housing demand should be modest -- but it probably can't prevent declines from occurring. The economic data for this week are all at the end -- with everything coming out on Thursday or Friday. On Thursday, the trade deficit is expected to climb to a near-record $59.5 billion in August -- mostly in response to higher energy prices. Also on Thursday, the import prices for September are projected to increase by 1.0 percent -- also reflecting mostly energy price gains. Additionally on Thursday, initial unemployment claims are expected to fall to around 365,000 for the week ending October 8th -- as the effects of Hurricane Katrina begin to ebb. On Friday, the consumer price index (CPI) should increase by 1.0 percent in September -- with most of the gain coming from energy prices, as the core rate should rise by only 0.2 percent. Also on Friday, retail sales are projected to climb by 0.4 percent in September -- with a sharp drop in auto sales more than offset by a 0.8 percent increase in retail sales excluding autos. Additionally on Friday, industrial production and capacity utilization for September are expected to fall by 0.4 percent and to 79.4 percent, respectively -- in response to Katrina-related shutdowns in the Gulf region. Also on Friday, business inventories for August are expected to rise by a modest 0.2 percent. Finally, on Friday, the University of Michigan's consumer sentiment index is projected to increase to around 80.0 for the first half of October -- as households begin to recover from the shock of Hurricane Katrina and higher energy prices. David W. Berson Fannie Mae Economics Last Revised: October 10, 2005 Charts at the link fanniemae.com