Wednesday, May 19, 2010

More Signs of Housing Glut

The New York Times had an interesting article on the state of the housing market. In Nevada, [and some in California, Arizona, and Florida], home builders are doing a great business selling new houses, even as inventory of already-built houses loom large in the local markets. This is bad, because it means that the real estate market has yet to hit the bottom.
Generally, new houses cost more than already-built houses. New houses are new, and has not depreciated. Everything works and has the "new" premium [supposedly]. The owner has a whiter canvas to play with. Only a good school district can keep up the value of already-built houses.
The article offered a couple of reasons why new houses are selling like hotcakes. 1. the recession has decreased the cost of both labor and material, giving the builders a much bigger margin to discount prices. 2. the existing homes are stuck in the foreclosure limbo: underwater owners cannot sell at a loss without bank agreement, and banks are not eager to realize their losses. So the existing inventory end up priced higher than the new inventory. In addition [not mentioned in the article], business credit lines are flowing again, following the credit freeze of 2009. The construction business greatly depend upon lines of credit to finance their operations. The re-opened taps allowed the builders to meet the pent-up demands for new construction.
Overall, this is bad on two levels:
1. Obviously, we still have lots of room at the bottom. Obama [and American people generally] are playing a dangerous game, trying to out-wait the recession. The mortgage modification program is only succeeding at buying time. We have not solved the fundamental problem of excess supply.
2. In addition, with so much inventory in the foreclosure pipeline, we will have an increasing problem of sub-urban blight, with the attendant law-enforcement problems. The housing problem is primarily a suburban issue, and the suburbs have less revenue to patrol their current areas.
So although the economic signs are still good, it is still a time for hedging your investments. And that will include guns and ammo for the suburban homeowners.

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