If we have any significant numbers of foreclosures in the coming one to two years, every one of them removes another potential home purchaser. Not only do foreclosures add supply, they simultaneously diminish demand.

Also, demographics are not helping demand. As baby boomers enter retirement with diminished retirement assets, the likelihood of moving to a new home in retirement is less than it was before the crash.

New household formation, which has been on the order of 1.2 million to 1.4 million per year (net), is probably going to continue. But not many new households have rushed out to buy a home in the past, and the number will be depressed even further by economic conditions. That will probably not have a significant effect on demand.

Location, Location, Location

Conditions will vary from market to market, so supply may be shorter and demand greater in some markets than others. The following table ranks housing markets based on two measurements.

There are four markets that appear in the top half of both lists: Washington, Cleveland, Chicago, and San Francisco, indicating these may be the strongest markets right now.

Weakest are the four markets that appear in the bottom half of both lists: Charlotte, Tampa, Los Angeles and New York.

Summary

Housing-sales volumes have risen dramatically since the beginning of the year in many markets. We may not see a repeat of the extreme low volumes. Prices remain within 3.6% of the lows and, heading into seasonal weakness, the national average price lows of April have a good chance of being taken out. Supply and demand challenges add to the probability that the price lows are not yet established.
John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.