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Reality Worsens in Housing

Last month I wrote a post about the reality of the housing market, and what that reality meant for home builders.  The news in the housing market was bad then.  Last week it got even worse.

Existing home sales fell 10%, and existing home prices fell to the lowest level in 9 years.  Even worse: new home sales fell 16.9% to a record low for the month of February; new home prices fell to the lowest level since 2003.  And housing starts fell 22.5%…to the lowest level since April 2009.  But worst of all: housing permits fell 20.5% year-on-year…to the lowest level ever recorded.

All of that is bad enough.  But what is interesting, and deserves notice, is the relationship between new and existing home sales: the housing crisis created a troubling rift between the two.

Distressing Gap

On the upside, that rift means that home builders will have room to run when the inventory of existing homes, and the overhang of distressed homes, clears up… eventually (the National Association of Home Builders estimates that the market will demand an additional 1.7 million new homes per year over the next decade).

In the meanwhile, small builders are particularly at risk, if you ask the NAHB.   Earlier this month the NAHB approached Congress to move to increase access to credit for small builders, because “without such action, there can be no housing recovery”, according to Chairman Bob Nielsen.  Lenders are putting pressure on builders: denying loan extensions and demanding immediate repayment of acquisition, development and construction loans (even though loans are current).

While a production credit crunch isn’t helping, what builders really have to worry about is the fact that they have to compete with a massive inventory of existing homes, short sales and foreclosures.  Access to credit won’t change that.

And large home builders face the same tough competition. 

Last month I said that the fundamentals of the housing market suggest caution.  Now the fundamentals of the housing market demand caution.


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