This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The U.S. Housing Market's Tug-of-War

In addition, the still high unemployment rate and overall global economic uncertainty outweighs the allure of more affordable homes. In the end, while affordability should help boost demand in the housing market, tight credit conditions should limit loan qualification and thus restrain some of the impact from affordability.

New-home sales (which normally surge after a recession) are bucking their historical trend. This is in fact the first time over the past 42 years that new-home sales failed to surge in the aftermath of the recession. Instead, this time around, sales have fallen 15%-20%, with new-home sales currently trailing the 40-year average by 55%, driven by foreclosures, tighter credit conditions and quite possibly by rising construction costs.

The residential construction producer price index, for instance, rose 5.5% year over year, up nearly 17% since early 2007. This contrasts widely with the 3.4% year-over-year decline in the value of home prices (measured by the S&P/Case-Shiller index), suggesting that the costs of building have outweighed the costs of selling, putting additional strain on industry profit margins. What's more, revenue from homebuilders has declined nearly 90% since the peak in 2006 (although margins, while volatile, have improved somewhat since 2009).

Arguably, the most significant factor driving home prices is the pace of foreclosures. Foreclosures influence home values as the change in delinquency rate impacts existing home inventories. So while delinquencies as a percent of total loans have declined to 7.9% in the third quarter from nearly 10% in March of 2010, foreclosures still remain at near-record levels of 4.3% of total loans.

According to Realtytrac new foreclosure activity in November 2011 was 224,000, just shy of the 239,000 pace seen throughout 2011, suggesting that the pace of foreclosure activity still remains troubling. Consequently, the existing stock of housing inventory is likely to remain elevated, indicating that home prices may remain subdued.

The current stock of total housing inventory (existing plus new) is currently 2.7 million units. Although this has steadily improved from the nearly 5 million units on the market in 2007, the existing supply still translates into 7 months worth of inventory, at current sales rate. This is also a few hundred thousand units higher than the average seen over the past 30 years. Similarly, estimates of the shadow inventory (foreclosures plus 90-day delinquent home that may be added to the existing stock of inventories) indicate the potential to see the current total inventory double, resulting in nearly a 20-month supply of homes (Chart 4).
3 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
AAPL $112.69 -0.20%
FB $90.72 1.10%
GOOG $630.88 -1.10%
TSLA $248.82 2.40%
YHOO $33.26 -1.30%


Chart of I:DJI
DOW 16,602.85 -51.92 -0.31%
S&P 500 1,992.33 +4.67 0.23%
NASDAQ 4,833.5740 +20.8660 0.43%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs