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August 25, 2006
Build It and They Will Come?

Every time a US housing statistic comes in below expectations the recession crowd gains a few new members. Should this trend continue for much longer expect that it will a US recession will become a self-fulfilling prophecy. Incidentally, there is no contrarian angle to play when it comes to recessions -- when everyone thinks a recession is coming this is usually the surest sign that one is already here. 

The main reason why actual nationwide price declines could be around the corner is as follows:

REAL ESTATE IS NO LONGER AN ATTRACTIVE INVESTMENT!

With the real estate speculators no longer enamored with the quick gains escalating US home prices previously provided, who is going to buy all the houses on the market today?


Investors Trying To Run

At the end of 2004 the US national homeownership rate reached a record 69.2%, and at the end of 2005 this rate dipped slightly to 69%. In other words, in 2005 which was the strongest year for existing US home sales on record there was no increase in the overall homeownership rate.   Why was the US housing market so strong in 2005 if the rate of ownership declined? One word: INVESTORS.

Suffice to say, with the speculators that dashed into the market in 2005 now trying to unload their spoiled investment at the same time the homebuilders are using more and more incentives to try and spur sales, the outlook is anything but good.  Rather, it will likely take a decline in US home prices before a notable increase in ownership rates can transpire.  Assuming the real estate speculators do not start acting sell-crazy, this adjustment could in fact be orderly. But remember, despite all the negative news on the housing market this week, the needed price adjustment in home prices has yet to begin.

The homebuilders have built plenty of houses, but who is going to show up and buy them?



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