Thursday, January 22, 2009

Housing: Gimme Shelter!

Housing starts are off sharply and so are permits. The growth rates for housing show that the decline is actually still accelerating after all this time. The charts above show that three-month growth rates are usually the weakest followed by six-month rates and then by twelve-month rates. That pattern says things are getting worse and at even faster pace.

The pace of starts has dropped back to 0.55mln units compared to new household formations; formations are running at about 1.5 mln per year. Thus the excess stock of homes is being whittled away by the light building calendar. But the excess in housing has to do with new and existing homes. Some areas of the country have a great excess supply; others are in better balance. The final arbiter on housing still will be pricies, house prices- and they are still falling rather rapidly.

Fed rate cuts to the extent they reduce mortgage rates could help to firm house prices. The drop in the cost of financing already has sent housing affordability up sharply. Unfortunately that flies in the face of banks that are tightening standards. Houses at one point were easier to buy because banks would approve funding so readily. Now with tighter lending conditions that include income tests and downpayments and at higher credit scores housing is hard to start even with lower rates. The rise in affordablity is not helping all that much, it is more theoretical than practical.

Still the Fed's rate drop is helpful as it facilitates those that do qualify for a mortgage to purchase a more expensive home. In some sense the drop in mortgage costs works like a cut in housing prices. The Fed is on its way to providing help and is expected to do more to drop home financing rates in the future. For banks whose mortgage portfolios are still spinning out losses that is welcome news as well as it is welcome news to consumers and potential home buyers - as well as to those trying to refi.


kenboe said...

I don't believe in the old adage that "there's nothing new under the sun" or that "everything's been done." I think originality is rejected, though, because for people who judge by the familiar, or by comparison, there is no way to measure the new.


Housing is in very bad shape indeed.