Buying & Selling: Ghost Towns

MyDD pointed the way to this speech from the president of the San Fran Federal Reserve. Most of it is typical boilerplate, but scroll down to her comments on the housing market, and things start to get really interesting:

Of course, housing is a particularly interest-sensitive sector, and, as we know, it already has shown clear signs of cooling. Frankly, the pace of it has been a little surprising. Nationally, housing permits are down noticeably—by more than 20 percent—from a year ago. In addition, inventories of unsold houses are up significantly, sales of new and existing homes are off their peaks, and surveys of homebuyers and builders are showing much more pessimistic attitudes....According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years. While builders remain hesitant to cut prices so far, and instead offer sales incentives, price cuts at some point in the future seem almost inevitable.

Almost? As Agent Smith was wont to say, "It is inevitable." As long as you have all that excess inventory sitting out there untouched and unwanted, the market is going to have to tolerate lowered prices. No one's going to buy if homes are worthless thanks to glut. Of course, the situation won't be helped by arrogant homebuilders who insist on continued development even when it's becoming clear that no one is buying:

"In the builders' eyes, there's no excuse for having a house standing there," said Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence, which follows the building business, in California. "They're doing everything they can to stop standing inventory from increasing any more."

Man, these days people can't hold on to the homes they have. What makes you think they're going to be splurging for more sh$tboxes unless the price is right?

Posted at October 18, 2006 02:23 PM

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MyDD pointed the way to this speech from the president of the San Fran Federal Reserve. Most of it is typical boilerplate, but scroll down to her comments on the housing market, and things start to get really interesting: Of course, housing is a particularly interest-sensitive sector, and, as we know, it already has shown clear signs of cooling. Frankly, the pace of it has been a little surprising. Nationally, housing permits are down noticeably—by more than 20 percent—from a year ago. In addition, inventories of unsold houses are up significantly, sales of new and existing homes are off their peaks, and surveys of homebuyers and builders are showing much more pessimistic attitudes....According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years. While builders remain hesitant to cut prices so far, and instead offer sales incentives, price cuts at some point in the future seem almost inevitable. Almost? As Agent Smith was wont to say, "It is inevitable." As long as you have all that excess inventory sitting out there untouched and unwanted, the market is going to have to tolerate lowered prices. No one's going to buy if homes are worthless thanks to glut. Of course, the situation won't be helped by arrogant homebuilders who insist on continued development even when it's becoming clear that no one is buying: "In the builders' eyes, there's no excuse for having a house standing there," said Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence, which follows the building business, in California. "They're doing everything they can to stop standing inventory from increasing any more." Man, these days people can't hold on to the homes they have. What makes you think they're going to be splurging for more sh$tboxes unless the price is right?