In a troubling sign for the future, the inventory of unsold homes shot up to the highest level in 15 years, meaning more downward pressure on prices in the months ahead until the inventory glut is reduced.
For many months its looked like this real estate downturn would be the worst since 1989-1991 but nevertheless there was that hope it would turn around first.
The median price of an existing home sold last month fell to $223,700, down 2.1 percent from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch on record.
Economists predicted home prices would likely head lower in the months ahead because of continued troubles in reducing the stockpile of unsold homes, which rose 5 percent in May to 4.43 million units. That was an 8.9 months supply at the May sales pace, a level that has not been seen since July 1992, the last time the country went through a serious housing slump.
At least the West was doing better than the South… but worse than the Northeast and Midwest.
He said activity in the existing home sales market, which accounts for about 86 percent of annual sales, would continue to suffer until builders were more successful in trimming their production levels for new homes, which make up the other 14 percent of annual home sales.
BINGO! That’s the solution.
The National Association of Home Builders reported earlier this month that builder sentiment dropped in June to the lowest reading since February 1991
Gee, you would think such sentiment would get home builders to slow production. But it ain’t happening nearly enough.
I now think the only solution is for some builders to go out of business. That looks like the only effective way to get home overbuilders to cut production.
{ 5 comments… read them below or add one }
KG 06.26.07 at 8:44 pm
DR Horton is the worst….Here in Maricopa DR Horton has built about 100 homes just a mile away from me in the last 6 six months. Very few of them have sold and the rest are specs. The newspaper reports permits for new homes have increased but sales have slowed. They need to stop building specs.
Not all homebuilders build specs like DR Horton and Centex. The question is why do the builders do this? Especially when the homes sit there and don’t sell.
Russ 06.26.07 at 9:44 pm
“The question is why do the builders do this? Especially when the homes sit there and don’t sell.”
Because builders build. They will continue to do so and make profits, or they will end their businesses, voluntarily or otherwise. Based on the speculative origins of 2004-2005 price leaps in Arizona, I am certain that it is still profitable for them to sell at the new market prices. As land options expire and are re-purchased more cheaply, and as lumber and other materials get cheaper, profitable selling prices for builders will go down even further. Ever see those freight train cars sitting by the tracks on Grand Avenue filled with Lord knows how much Canadian lumber? It is amazing that there ever was a run-up in lumber prices, even with building frenzy, as plentiful as it appears to be.
Todd 06.29.07 at 9:07 am
It’s easy to blame the current problem on builders. The truth is that builders will make production cuts to some minimal level that they can sell in order to pay fixed costs and minimize losses. It just may take them some time to find the optimum production level for existing market conditions.
The real problem is the speculative rise in prices we’ve experienced over the last few years driven by historically low interest rates, creative financing, and the wave of speculative investors that followed.
The solution is the inevitable regression to the mean rate of historical price increases as interest rates rise from their low, creative lenders and borrowers discover that creative doesn’t necessarily mean low risk, and speculative investors are forced to trade their Lexus’s for Chevy’s or worse.
Bingo? No. Ouch? Yes!
KG 06.29.07 at 9:17 am
DR Horton is a spec homebuilder. Why put up over 100 homes in one area in a few months when the inventory is over 50K. Most of the builders have learned their lesson and build once they have a contract and down payment.
3 years ago almost all the homes were specs because the builders could not build them fast enough. The spec homes hurt the entire housing market.
If you live in a new area and are trying to sell your home, you can not compete with the price of a spec home and the special financing they offer. The builders will pay closing costs and give you a 3-2-1 buy down on the mortgage.
John L. Wake - Realtor 06.29.07 at 10:47 am
The handwriting was on the wall in the summer of 2005 but the builders really didn’t slow production until a year later. I think the builders are extremely slow to adjust to down markets.
They adjusted very well to the rising markets with many new home prices increasing by $10,000 a month. New home builders are the price leaders in the outlying areas so when they raised their prices it created an umbrella under which resale home could raise their prices as well.
It was more than just low interest rates, etc that caused prices to skyrocket, it was the price leadership of the builders.
They also adapted by not selling homes until they were much further along in construction so they could take better advantage of the rising prices. The downside was when the market slowed they had a higher than normal inventory of unsold homes.
The overbuilders did a great job of squeezing the most profit out of the boom years but they’ve done a horrible job of adjusting to the new reality.
I don’t mind them discounting their inventory when the market slowed. It’s their continued head-in-the-sand overbuilding that is destructive to the entire real estate market.
It looks like they can’t control themselves so it will take a recession and a shakeout in the industry to significantly cut production.