Reed Construction Data

Necessary conditions for housing recovery now in place

The three market changes that are necessary for the housing collapse to end and a susrtainable recovery to begin are now happening quickly. Banks and other lenders are now substantially re-capitalized, the surplus inventory of homes for sales is being sharply reduced and home prices are falling rapidly in the most depressed housing markets. Each of these three processes is sufficiently complete for housing starts to stabilize or at least only decline marginally in the next few months.

Nonetheless, as these processes are completed there will be more bad news for many months about bank write-offs of bad mortgage paper, excess homes for sale and falling home prices.  There will also be more bad news about mortgage foreclosures and the spread of housing market problems into the rest of construction and the broader economy.

Still, at the front end of the housing market, on the job site, all or virtually all of the damage is now behind us.  This means rising orders — from a very depressed level — for supplies delivered to the job beginning as soon as late spring.

In the last few weeks, banks have obtained new capital to replace much of the emergency short-term loans from the Federal Reserve Bank and other central banks.  Some of this capital came from sovereign wealth funds and private investors taking advantage of the opportunity to buy bank equity cheap.  Some capital came from the FRB guarantee of up to $30 billion of depreciated asset backed bonds held by Bear Stearns.  More capital came from lowered capital reserve requirement for Fannie Mae and Freddie Mac which permits them to expand lending with their existing capital.  Also, the Federal Housing Authority (FHA) has new authority to issue mortgages.  These actions are clearly positive short –term but have serious long-term consequences for inflation.

The surplus home inventory fell deeply in February and almost certainty has fallen more since. Homebuilders cut new home completions 116,000 (annual rate).  The total inventory of homes for sales dropped 136,000.  Some of the inventory cuts came from demolishing abandoned homes that have been vandalized and stripped of copper. Expect more of this.  Further inventory cuts came from large homebuilders mothballing partially built developments, removing the homes from the market.

Price cutting has become more intense in the most distressed markets in the Southwest and Southeast.  Some of this is foreclosure sales, either by the lender that got title to a home it did not want or the homeowner accepting a discounted price to get out of an unaffordable mortgage.  Some homebuilders are also being forced to cash out for whatever they can get.

There is still a dark cloud over this tentative end to the housing collapse.  Congress and some states may provide $billions to permit homeowners with little or no equity to keep homes that they could not have afforded to buy except during 2005-06 when the usual mortgage approval rules were suspended. Congratulations if you can get on this list. It is the same deal that a few lucky households have been getting for several years when they win the lottery for the right to buy homes in an affordable housing development at far below the market price. If congress spends heavily on this giveaway, it will restrain the drop in home prices and delay a sustainable recovery of the housing market.

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