The worst maybe over... the rebound is in sight!!!!

By
Mortgage and Lending with Cherry Creek Mortgage

The pain that homeowners and homebuilders are feeling now is a sign that
 things are going to get better.


 The news that housing starts have fallen to their
 lowest level in 17 years sounds like one more reason to be depressed                                          about the shrinking value of your home. In fact, it's an almost certain sign
 that the path to a housing recovery is finally in sight.


 If prices are going to stabilize, let alone rebound, the United States
 needs to produce far more first-time home buyers than new houses. That's
 the only way to tame the glut of "For Sale" signs dotting front yards from
 the Inland Empire of California to the Gold Coast of Florida.
 Builders constructed far more homes from 2002 until 2006 - the peak bubble
 years - than could possibly be absorbed by the normal growth in
 households.


 As a result, the market is now swamped with one million new and existing
 homes for sale that aren't occupied, and hence need to sell quickly.
 That's a multiple of the figure in most downturns, and it testifies to the
 duration and girth of the bubble.


 "For the recovery to begin, builders need to eliminate the standing
 inventory of finished, unoccupied new homes," says Mike Castleman, founder
 of Metrostudy, which assembles sales data on four million subdivisions
 across the U.S.


 The massive overhang of unsold inventory has remained stubbornly high.
 Sure, builders cut back, but sales dropped just as quickly.
 Now that excess supply is finally beginning to shrink. In April, the
 number of new homes for sale stood at 456,000 according to the U.S.
 Commerce Department, still a big number, but 93,000 below the mountainous
 figure a year ago.


 The return of the first-time buyer
 The key player in any recovery scenario is the first time buyer. The
 housing market operates with a pronounced laddering or ripple effect. When
 entry-level buyers flood the market, they not only stimulate production of
 new homes, they purchase existing homes. Those purchases, in turn, allow
 the sellers to move up to bigger houses.


 But when the first-timers are absent, the entire buying chain gets frozen.
 Today, newbies are coming back. Why? For the first time in years,
 entry-level homes are affordable. Builders have slashed prices, and what
 they're building tends to be far smaller than the McMansions of the boom,
 selling for far lower prices. KB Home's average selling price dropped to
 $248,0000 in its February quarter, versus $267,000 a year earlier. In
 2006, KB's basic model in Victorville, Cal., a former boomtown east of Los
 Angeles, took up as much as 3,800 square feet and sold for $328,000.
 Today, its stripped down offering goes for $220,000, at less than half the
 size.


 So the first time in a decade renters can carry the mortgage payments and
 taxes on a new house for what they're paying a landlord. Call it the New
 Affordability.


 Here's how the numbers play out: Single-family housing starts are now
 running at fewer than 500,000 a year. The normal demand for housing, based
 on immigration and household formation, is around one million units.
 We won't get back to that figure for a while because so many people rushed
 to buy homes during the boom.


 But with first timers returning, sales should rise to almost 700,000 units
 by the end of next year, according to Bernard Markstein, senior economist
 for the National Association of Home Builders. That means sales will soon
 exceed new production by as much as 250,000 units a year.
 That margin forms the foundation of the housing revival that comes in four
 steps.
  Step 1:
 First, the return of first-time buyers will shrink the overhang of new
 houses for sale.

  Step 2:
 Second, because so few new homes are being built, first-timers will start
 buying existing homes from owners who want to move up but have been
 trapped by the dearth of buyers. Their improved fortunes, though, come
 with a big caveat: The prices of new homes are now lower than
 comparably-sized existing homes. It's as if used cars are selling for more
 than new ones. That can't last. So move-up buyers are going to have to
 accept less than they had hoped to get for their current homes.
  They'll get a big break as they trade up, however. Unless they bought at
 the height of the boom, they'll still sell at a profit. They can then use
 that equity to buy bigger homes at bargain prices. During the bubble,
 homebuilders started pushing up home sizes to 3,500 square feet or more.
 It's those behemoths that are selling for the steepest discounts today.
  Step 3:
 Next, housing starts should start rising, probably next year. The
 increase, however, will be slow and gradual. For the next two years at
 least, homebuilders will compete ferociously with existing home sellers
 for customers.

 Step 4:
 Eventually, the glut of existing homes will disappear as well. The excess
 of new-home buyers over new homes being built makes that inevitable. But
 the oversupply is so enormous that the healing process could take as much
 as three more years. Only then will prices in former bubble markets start
 rising again.

 What could go wrong?
 One event has the potential to slow or even derail the recovery: A sharp
 rise in interest rates. Right now, the first-timers are gorging on 6%
 loans guaranteed by the FHA. But rates may not stay there.
 If they rise to 8% or higher because inflation rebounds, it would take a
 far bigger drop in prices to make new and existing homes affordable.
 The New Affordability is now in place. But if rates rise, we'll have to
 establish a New New Affordability - at even lower prices.

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Ambassador
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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

Right on...there are so many reports now out that believe that the bottom is here or soon to be here.

Jul 11, 2008 02:13 AM #1
Ambassador
895,735
Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

Right on...there are so many reports now out that believe that the bottom is here or soon to be here.

Jul 11, 2008 02:13 AM #2
Rainmaker
245,358
April Hayden-Munson
Brookfield, WI
Brookfield Wisconsin Real Estate

Hey Rick!  Did you see?  Jason is BAAAACCKKK!  Glad to see it. 

Aug 10, 2008 03:18 AM #3
Ambassador
895,735
Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

I love all of your wonderful posts.  You've been AWOL dude.  Pulling a Jason on me.  I'm going to be up there tomorrow night working on another branch.  Just wanted to say hello.

Aug 27, 2008 08:50 AM #4
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Rainmaker
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Rick Kellow

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