The United States housing market recently wrapped up its best selling season in three years. Prices of existing homes, as measured by the Case-Shiller 20-city index, now stand 3.6% above the lows set in April; unit volumes of existing home sales are 15% above their November 2008 low; production of housing was 25% higher on a seasonally adjusted basis in August than at its April low; and some homebuilder order books have even started to grow for the first time in about a dozen quarters. In all, a pretty good couple of months that surprised most market participants in its direction as well as its magnitude.
As the market heads into the fall, there is considerable difference of opinion as to the sustainability of the current path of home prices. Is this recent strength the beginning of a sustainable bottom, or just a dead-cat bounce? Well, I can say with some certainty that prices are weakening as I write, but not by any more (and maybe even less) than in a normal year at this time. Seasonality is strong in housing, buoying prices in the spring and weighing on them in the later part of the year. In truth, it won't be until next spring that we have a good idea about the answer to the above question, but activity in 2009 suggests something is afoot. Buyers came out of the woodwork in places like California, and to a lesser extent in Phoenix and some areas of Florida, suggesting that prices in the harder-hit areas are attracting bargain hunters in very large numbers. This hasn't been the case for a few years, indicating the ballgame may have changed (with some generous help from Uncle Sam).
Head Winds
It's well-known that there are still significant head winds, the largest of which is the massive number of homes that are going to be coming back to the market over the next several years. In fact, we think it's a foregone conclusion that at least 4 million units will be foreclosed upon over the next couple of years (recent estimates by other researchers are as high as 7 million). With annual sales currently running at a bit more than 5 million annually, these 4 million-7 million units have the potential to cause some problems if dumped on the market at a rapid rate. Indeed, many of the housing pessimists have seized upon this as sure-fire evidence of lower housing prices going forward. Massive amounts of "supply," coupled with a tight lending environment, the expiration of a government handout, and a shrinking job base, means that prices absolutely have to go down in order to meet a market-clearing price, the theory goes.
This may be the case, but I doubt it. The above analysis sounds elegant, but like many elegant-sounding theories it is probably wide of the mark because it improperly categorizes bank-owned properties as "new supply" when it's really nothing of the sort. The overwhelming majority of this inventory was built years ago and therefore is already part of the existing supply. In some cases, it may even already be included (or has been included at some time) in the "for sale" statistics. Authentic new "supply" (housing starts) currently hitting the market is actually quite low. In fact, it hasn't been this low since at least 1959 (and probably a lot longer, but we don't have data prior to then). This year, builders will begin construction on somewhere around 620,000 units, a number that's about 32% below the old record low of 906,000 set--you guessed it--last year.
