Homebuilders: Cheap but Not Easy

The recent readings for the housing market have been mixed, but overall the housing market is weakening.

Year over year, the inventory of existing homes on the market is up 39% to a current five and a half months of supply. And the monthly housing market index published by the National Association of Homebuilders (NAHB) shows a reading down 4 points, to 50, for the period mid-March through mid-April, which is down 22 points from its cyclical peak of 72 set back in June 2005. There are 550,000 new homes on the market, the most in history.

The readings from various sources of data for existing and new homes have been confusing, to say the least, but in my judgment a change in trend is under way, and it's not positive for homeowners or for their shareholders.

Housing starts for March showed a plunge of 7.8% to 1.96 million annualized, which was weaker than expected. Existing-home sales edged up slightly for the nation in March, but the inventory of unsold homes reached a record high. New-home sales rebounded 13.8% in March, after plunging 10.5% in February.

The housing market is not as strong as this week's headline numbers for existing- and new-home sales. Jack Phelps, the regional manager of the FDIC Division of Insurance and Research in Atlanta, tells me that the attrition rate (canceled contracts) historically runs at about 10% in normal times and is not included in monthly adjustments. Today, 20% to 30% of existing- and new-home sales are being canceled by the buyer. Reasons include "can't sell current home," "can't get a mortgage," "cold feet."

Therefore, the housing data are overstating the true state of this important segment of our economy.

The housing market is deteriorating, as the residential investment share of GDP is at a 50-year high, according to a Credit Suisse First Boston report. The average price of a single-family home peaked at $229,000 in the June through October period last year and is currently $218,000, down 4.8%, per my analysis of NAHB data. The market is shifting from a seller's market to a buyer's market.