Friday, September 25, 2009

For prospective U.S. home buyers, time is on your side, yes it is

By Money Matters Editors

Some economists and realtors are forecasting a quick snap-back in the U.S. housing sector. Nope. Sorry, it doesn’t work that way, as the grade school kids say in the states. Here’s why:

First, there’s the inventory bulge from the housing sector’s bust. As the National Association of Realtors’ August existing home sales report released Thursday indicated, there’s still an 8.5-month supply of existing homes on the market in the United States at the current sales pace.

True, that total is down from the 9.3-month supply level of July, but it’s still well above the inventory level during typical conditions: a normal, healthy housing market has a 3-5 month supply of existing homes.

Institutional investors, the big guns who make markets, follow several housing statistics (and other stats), but they closely monitor existing home sales data because they constitute the bulk of home sales. Moreover, because the housing sector affects so many lateral sectors (furniture, appliances, landscaping, insurance), housing, at least historically, has been a barometer of overall U.S. economic health.


Mortgage availability: still a concern

A second reason to not expect a quick snap-back in housing concerns mortgage availability. The liquidity crisis is over but the credit crunch is not. Banks/mortgage lenders are still not granting enough mortgages to good-credit, prospective home buyers. Less than three short years ago, a FICO credit score of 700, stable income, and a 10 percent down payment would qualify one for a 6.5 percent, 30-year, fixed-rate mortgage. Today, given the same factors, even a credit score of 750 (which is very good) will not guarantee one a mortgage.

A third factor concerns job growth. Historically, absent job growth, the home sale market struggles: actual household formation suffers, and those who already have a home and who would typically trade-up when needed, tend to wait until economic conditions improve. Currently, the U.S. economy, which has lost 7 million jobs during the pronounced recession, is still shedding about 200,000-250,000 jobs per month.

In sum, given the enormous supply of homes, the lack of buyers, and zero job growth, don’t look for a bottom in home prices in the short-term. The NAR said the national median existing-home price for all housing types was $177,700 in August, a decline of 12.5 percent from August 2008. Given current sales trends, it’s unlikely that home prices will bottom before the spring 2010, and probably for longer than that.

For investors, the above means a cautious stance is prudent concerning cyclical stock investments: protracted housing sector sluggish could create a double-dip recession.

For potential home buyers, the advice is obvious enough: time is on your side, yes it is, as Mick Jagger and The Rolling Stones sang. If you do not have to buy, prices are likely to be lower six months from now, in many U.S. metro areas.

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