New-Home Construction, Existing-Home Sales Climb

New-Home Construction, Existing-Home Sales Climb
October 23, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)
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Residential home construction in September hit its highest level in four years, and in some markets, existing home sales also have been surging.

The U.S. Commerce Department reported housing construction starts were up 15 percent from August and nearly 35 percent from September 2011 levels.

“Builders are responding to the rising demand for new homes as consumers begin to feel more confident about their local markets and put back into motion purchasing plans that were on hold during the recession,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla.

He added, “While September’s surge in activity is certainly encouraging, we need to remember that we still have a long way to go back to a fully functioning market -- and in order to get there, significant challenges must still be addressed in terms of credit availability and appraisal issues, as well as the increasing cost of building homes due to rising materials prices and a declining inventory of buildable lots.”

Higher Across Most of Nation

Combined single- and multifamily starts rose in all but one region of the country in September, with a 6.7 percent gain in the Midwest, a 19.9 percent gain in the South and a 20.1 percent gain in the West. Only the Northeast posted a decline, of 5.1 percent.

Some markets have also been seeing big increases in existing home sales. In the Chicago area, for instance, existing homes sales in September were 24 percent higher than in September 2011, according to the Illinois Association of Realtors. Though there was a slight dip in existing home sales nationally in September from the two-year high set in August, existing home sales overall through September 2012 were about 11 percent higher than one year ago.

The news comes with record-low interest rates on residential mortgages and a commitment from the Federal Reserve to spend $40 billion a month for an unlimited amount of time to buy mortgage-related securities. These purchases aim to hold interest rates at low levels to boost the real estate market.

Low Rates, Low Prices

“We are seeing a perfect storm of the lowest interest rates and the lowest prices ever — the first time I’ve seen both at the same time,” Zeke Morris, president of the Chicago Association of Realtors and managing broker at Keller Williams Realty in Hyde Park, told the Chicago Sun-Times.

Is the recent apparent improvement in the housing market real? Anthony Randazzo has his doubts. Bill Gunderson believes it is real.

“There are about 14 million empty homes in the U.S.,” said Randazzo, director of economic research for Reason Foundation. “They aren’t on the market because people are expecting prices will go up, based on the faulty assumption we’re in a housing recovery. The reality is foreclosures have been down because of robo-signing scandal. That’s slowed foreclosures. I think we’re going to see an increase in foreclosures that will push down prices.”

Only Direction Is Up

Randazzo also has doubts about the long-term ability of the Federal Reserve to artificially hold down mortgage interest rates. Eventually, he said, lenders will object to the currency debasement that results from Fed money printing and will demand higher interest rates to compensate.

“We’re going to eventually see mortgage rates go back up. They’re so low, up is the only direction they can go,” he said. “That will put downward pressure on housing prices as well.”

Investments expert, commentator and stocks newsletter publisher Bill Gunderson of Gunderson Capital Management says he sees encouraging signs.

“I’m kind of a bottom up guy, looking at the individual companies, as opposed to looking down and trying to guess the overall direction of the global economy,” Gunderson said. That bottom up look is showing him some home builders with triple-digit gains in their stock prices over the last 12 months, and the stocks of ancillary companies such as Home Depot up several times more than the overall stock market.

“The stock market rarely gets things wrong,” Gunderson said. “The market is not going to price in these huge gains into these stocks if it does not already recognize and see that housing has turned around – it has hit bottom.

‘About Supply and Demand’

“It’s all about supply and demand in the end,” Gunderson said. “New homes, there  haven’t been any built in the last five years. We’ve had to work off all this inventory, shadow inventory, foreclosures, short sales. I’d say for the most part that’s been cleaned up, and now there’s a demand for new homes, and there aren’t any new homes.”

He added, “Housing ebbs and flows, supply and demand have a lot to do with it, and sometimes housing goes to the extremes. Go back to the early '90s here in California, and we had the S&L crisis, and we had a major washout of the housing industry, which was booming at the time. This latest cycle I would call more of a bubble. Did government have anything to do with the bubble? Probably yes, because money was so cheap.

“I believe now we’re having kind of just a natural recovery” although the Federal Reserve is holding interest rates to artificially low levels, Gunderson said.

“I see today with JP Morgan and Wells Fargo reporting earnings, I see mortgage originations at Wells Fargo are up 53 percent year over year, and a big part of that is because of the low interest rates. But I think even if interest rates were where they should be now, I still think the supply demand issue is the overriding factor here.”

 

 

 

 

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)