Sorting Out the Confusing Direction of the Housing Market
Recent data shows conflicting signs about the present state of the housing market. New home construction shows no signs of slowing down, but at the same time mortgage applications and existing home sales are clearly showing signals of a cooling housing market. While many analysts are conflicted over this puzzling data, Financial Watch believes recent data further points to signs we are in a housing bubble. The real estate bubble will deflate itself over a much longer period than past bubbles in stock prices or the commodity markets. The simple reason for this is the fact homes are a necessity in our economy. In some markets it may take up to a decade to completely absorb the excess housing inventory created during the past couple years. Miami’s condominium market is a prime example. Most markets will recover much more quickly or may even go untouched. Much of the real estate appreciation has occurred on the coasts. Cities such as Dallas that have not experienced the rapid run-up in prices and should not have their real estate markets dramatically impacted by the slowdown.
New home construction should remain fairly robust during the first half of 2006. Even though homebuilders are clearly seeing signs of excess supply, selling prices remain attractive enough to homebuilders to continue construction. Several of the major homebuilders, including Toll Brothers, have warned next years forecasts will not be met. However as long as present home prices persist, Toll Brothers and its major competitors can still realize strong profits even if their new homes go unsold for several months or incentives must be offered to unload inventories. New home construction will only slow down once either inventories reach undesirable levels or home prices fall substantially. By this point the damage will have been done.
Financial Watch expects to see a clear pattern of depreciation emerge in the U.S. housing market by the middle of next year. Home prices will not fall off a cliff, but rather show a clear weakening trend that will last at least two to three years before more normal market conditions return.