Wednesday, July 21, 2010

WSJ: Housing Market Stumbles

by Bill McBride on 7/21/2010 08:55:00 AM

Nick Timiraos and Robbie Whelan write at the WSJ Housing Market Stumbles. A few excerpts:

The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metropolitan areas shows that inventory levels have grown in many markets.

... newly signed contracts in May and June have plunged. ...

More broadly, the housing market faces two big problems: too many homes and falling demand.
A few comments:

  • It appears the existing home inventory is still rising, and with a plunge in sales in July and August, the months-of-supply metric for existing homes will probably be in double digits (over 10 months) later this summer. That historically means falling prices (about 6 months of supply is a normal market).

  • Although there are markets where there is just too much supply (like Detroit), in most markets the problem is too much supply at the current price. So falling prices will help clear the market.

  • The housing tax credit was a clear and unequivocal failure. Not only did most of the benefit go to people who were going to buy anyway, but the credit didn't reduce the overall supply (the total supply includes both homes and rental units). The credit just incentivized some people to move - and pulled some sales forward - and to the extent the credit went to new home sales, it actually was counterproductive by increasing the excess supply. This is a textbook example of bad policy.

  • The unemployment benefit extension was helpful for housing. Not only does this benefit go to people who will probably spend it, but it keeps households in place - otherwise more people would be doubling up with friends or living in their cars. This might not be the most effective policy, but at least it was helpful (as opposed to the housing tax credit).

  • This double-dip in housing should be no surprise. I wrote about it last summer (and many others have too).

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