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Real Estate Guide 2007
2007 overview
The real estate market was bed-ridden last year but 2007 brings new hope the market will get back on its feet.
2007 Overview
Only long thaw will help icy new-home starts

Home builders are suffering from a frozen construction market, and forecasters say conditions aren't likely to start warming any time soon.

A combination of overproduction and a retreat by real estate investors ushered in the cold snap, and economists say it is going to take time and discipline for the new-home market to thaw itself out.

By the end of 2006, builders were beginning work on a seasonably adjusted 18 percent fewer homes than the year before. A glut of existing homes is largely driving that slowdown.

"We grossly overproduced the market, and we have to clear that out," says Dave Seiders, chief economist for the National Association of Home Builders.

One way economists measure the housing market is by calculating how many months it would take to sell all the homes listed for sale at the current buying rate.

According to Mickey Levy, chief economist for Bank of America, the inventory of unsold new houses nationwide fell from a high of 7.2 months' worth of homes sitting on the market in mid-2006 to 5.9 months in January. While that's an improvement, Levy says he would prefer to see that number in the range of 4.5 months.

Beginning in July 2006, the level of new-home sales appeared to end its freefall and flatten out, Levy says. But while the sales figures stopped hemorrhaging, they also didn't post numbers that might encourage contractors to build more homes.

To worsen the situation, part of what stopped the bleeding was that builders began discounting their existing housing stock to help sales along.

The good news is that as buying continues, even at its anemic pace, it will eat away at the existing inventory. But until that number falls to a point that demand picks back up, construction crews across the country sit idle.

"And you can expect home building to remain subdued until inventory is whittled down further," Levy says.

To see where the cold front came from, Seiders says you need to look back in time. During 2004, 2005, and, in some cases, 2006, many housing markets nationwide were in an unsustainable boom, he says.

"Builders were recording growth and sales that the markets could not sustain," he says. "In many areas, that was driven by an unusual amount of investors and speculators pouring into some markets."

Low interest rates and accommodative lending also combined to stoke the flames, Seiders says.

"Coming to the end of last year, we knew we were in for a correction in housing starts. We certainly got it," he says.

-- Posted: March 8, 2007
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