Shrinking the Supply of Houses will End the Housing Slump

Shrinking the Supply of Houses will End the Housing Slump

By: Nick Deonas

Douglas Porter, deputy chief economist at BMO Capital Markets said demand for new homes in the U.S. was at a 23-year low in August, while the number of unsold homes was enough to supply the market for about 10 months – two-thirds higher than historic norms. He said with cheaper existing homes failing to sell, demand and construction of new homes would likely continue to ease. “Why buy a new home when a foreclosed property is selling for a song?” Mr. Porter said.

Patrick Newport, U.S. economist at Global Insight in Lexington, Massachusetts, expects U.S. housing starts to fall below the 1-million mark this year. “This last happened in 1945, when the United States was fighting World War II and only 326,000 units were started,” he said. He predicts housing starts in the fourth quarter to drop to a record low of 823,000 units.

Of course there are many factors to consider when figuring out the housing crises. If you look at the current supply of homes on the market then it becomes apparent that new housing starts will suffer until the supply is reduced. So how do we reduce the current supply? Sell them of course, but what if the buying public is not buying? This has been our situation for the past year or so here in the U.S and is now spilling over into Canada and also the UK. The key to reduction of the supply, as I see it, is directly tied to the financial world. The American dream is still home ownership, and people will take advantage of it when it becomes affordable to do so.

New home construction in the U.S. tumbled to the lowest level in 17 years in last month, but supply would need to fall much further before house prices stabilize, economists say. “The lower the level of housing starts, the better,” Michael Englund, chief economist at Action Economics in Boulder, Colorado, said. It is a situation that is beginning to play out in Canada. Inventories of unsold homes have risen as demand pulls back, exerting downwards pressure on house prices. However, Mr. Englund said Canada would be unlikely to suffer to the extent of the U.S., because it avoided the sub prime mortgage mess. He said house price bubbles in Canada were smaller and have less room to fall.

In July, U.S. housing starts plummeted by 11% compared to June and by almost 30% over the year to a seasonally adjusted annual rate of 965,000, recent U.S. Census Bureau figures showed. The result reversed the previous month’s double-digit gains, which were caused by changes to the New York City construction code. As a result, Mr. Englund said housing starts were moving sideways and needed more months of decline. That could soon happen, with U.S. building permits for single-family homes down 5.2% in July to 584,000 – the lowest level in 26 years. Total permits slid 17.7% to 937,000 in the month to be down 32.4% from a year earlier. Mr. Englund also said the economy would benefit more from a sharp decline in home building than it would from trying to encourage growth in the house building sector, which only accounts for about 3.4% of gross domestic product. “What we’re trying to do is unwind inventory because as long as the inventories are hanging there, the value of mortgage instruments is being pushed down, which is impacting banks and impacting the ability of people to obtain financing,” he said.

No where is the imbalance of demand and supply more apparent than in Detroit, Michigan, where properties listed for as little as US$1 still remain unsold. A quick search on realtor.com revealed that four homes in Detroit were listed for US$1, while over 180 were selling for less than US$1,000. The foreclosed properties are dirt cheap, even accounting for tax liabilities, but they are not being snapped up.

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