A Forecast to Take to the Bank

Implications: Everyone has an opinion on when the housing market will hit bottom and rebound.  We at Belfiore Real Estate Consulting believe you only need to understand one concept and follow one stat to predict the bottom of the residential market today.

Analysis:

Everyone seems to have an opinion as to where the housing market is headed, its affect on the overall economy, if it has hit bottom, and if not, when it will hit bottom. The economist wants to be the first economist to correctly tout housing’s turnaround. The contrarian investor wants to be the first to invest in his opinion on when the market will rebound, and in the process make a bunch of money on housing stocks and other investments. And, financial organizations, waiting on the sidelines for distressed investment opportunities, want to be first to look at the best deals available, and thus, the first to predict the bottom. Everyone seems to have a different approach to forming an opinion and everyone seems to be as convinced that theirs is the soundest opinion.

The direction of the housing market is about as easy to predict today as it has been in the last decade. Follow speculative supply and you will be following the leading indictor of the direction of the market. In the largest U.S. housing markets, the number of houses under construction or complete is the primary factor controlling the future direction of prices and home builder performance.

In Phoenix, Belfiore Real Estate Consulting’s (“BREC”) home base, speculative supply has been on the rise throughout the entire year. There are approximately 7,500 unsold homes under construction or complete. Of these 7,500 homes, 5,500 are complete or within 60 days of completion. This supply is being discounted heavily- so deeply that most buyers would never consider purchasing a home unless they wanted to take ownership within the next 60 days.

Making matters worse, continued downward adjustments to prices, have created a perpetual cancelation environment. Most home builders have discontinued speculative supply construction, but cancelations are a little trickier. Until prices stabilize, cancelations will likely continue, adding to existing complete supply.

I encourage you to follow all of the statistics you can acquire, but when considering the market’s turnaround today, you really only need to understand one concept and follow one data point. The concept is SUPPLY and Demand and the statistic is speculative supply.

The housing market has not hit bottom. BREC anticipates further discounting during the next couple of months and further increases in supply. Watch for stabilization in mid-2007.