Real Estate Drifts Lower … Again

There is, of course, nom news in the headline that the housing sector is still sliding rather than recovering. The only reason that the decline appeared to have been arrested as the enormous effect of the government stimulus. That poured enough cash – in the form of tax credits – into the industry to limit the rate of decline late last year and even to produce a few months of very slight recovery early this year. With that part of the stimulus package now history we are left looking at the ‘raw’ activity underlying the stimulus induced level.

It’s not a pretty sight.

In fact its downright awful.

Housing starts dropped a further 5% in June, following May’s huge 15% collapse. The effects of the tax credit can be sen in the lopsided figures for the year so far: completions of new homes – most of which were started after the credit was announced – shot up to an annualized rate of 886,000 in June; but the number of houses under construction, but not complete, plummeted to 450,000, the lowest number on record. Talk about whiplash. This odd set of numbers culminates in the fact that the inventory of unsold new homes now stands at a 40 year low. Clearly the industry is dormant. Yesterday’s release of confidence amongst home builders confirms this: only 1 in 7 have an optimistic view of the next few months. That’s an ugly statistic, but at least it’s up slightly from the rock bottom it reached last year.

Lastly, permits for new home construction, which is an indicator of future construction, rose 2.1%, but that gain was purely due to a few large multi-unti projects. Permits for single family homes dropped 3.4%.

Overall, the state of home construction can be summed up by this: starts are down 5.8% from this time last year, and 76% from the peak reached in 2006.

Why?

The bubble.

Real estate is still expensive compared with the other sectors of the economy. Home prices are above market clearing levels, and even though mortgage costs are at all time lows, purchasers are still way too wary of job prospects and possible wage declines to undertake a long term commitment. Since the economy appears to be headed into reverse at the moment, I doubt that there will be any substantial recovery in real estate until well into 2011. Indeed, I think things will slide a bit further unless the economy perks up soon. And that is not going to happen.