Summary
Recent sharp declines of housing sector indicators will move the market closer to the pricing equilibrium needed to jump start sales as home builders clearout excess inventory and resellers face-up to market realities.
Analysis
Home builders will continue to be underpressure as they work through their cash reserves and attempt to shrink thier balance sheets by reducing overall inventory by 500,000 dwelling units to 1 million new starts anually. Housing starts will continue to fall through 2009 as foreclosures increase and until consumer confidence is restored, and home buyers recognize stable pricing at the bottom of the market.
As the population continues to grow and everyone comes to terms with new home mortage underwriting criteria, and prices continue to adjust to more affordable levels, pent-up demand will enventually breakout in markets where housing choices are driven by changing demographics and lifestyles.
Value oriented buyers will return to a more conservative view whereby the home is part of their lifestyle and less so an investment vehicle. While the cost of construction may ebb short-term, the cost of materials and more stringent builing codes designed to lower energy consumption will push the price of starter homes higher and effectively reduce the pool of potential buyers as unmet demand for affordable housing continues to grow.
Residential developers and home builders in particular will retreat to what they believe are historically the strongest markets and attempt to compete at the high end of these markets with product that positons the buyer in a heavily amenitized enviornment andspeaks to their lifestyle.
The bad news is that housing values are continuing to decline and impact consumer confidence. The good news is that that pricing in the secondary mortage markets appears to be stabilizing, and the decline in housing starts and values will eventually bring effiency and stability to the market as the excesses of the past three years are marked down and/or written off. As home builders go, cash is king
