Disappointing New Home Sales Data

One of the big stories in the Real Estate world today is that New Home Sales plummeted in February to the lowest level of sales since record began in 1963 AND median prices are at a 7 year low.

Why should we be surprised?   Consider the following:

• Unemployment is still high.  Nationally 8.9% is reported and locally unemployment increased to 11.2%.  Bad as this is, other indicators indicate that this greatly underestimates the situation.   Gallup's poll of unemployed AND part time workers seeking full time work reported 19.9% "broader unemployment."  Other measures estimate a "broader unemployment" exceeding 20%.
• Credit is still tight.   Although interest rates remain at historically low levels, getting loans is very difficult.  Financial Institutions are appropriately more stringent than they were during the sub-prime lending days.  The net result is that the percentage of people who can qualify is much lower.
• The Mortgage Foreclosure Crisis is not over.  According to a study by CoreLogic, nearly one fourth of all mortgages are underwater - meaning that they owe more on the mortgage than the property is worth.  That study also found that another nearly 5% of homeowners had 5% or less equity remaining.  With home prices continuing to decline, you would expect this number to be increasing.
• Incentive Programs have expired.  During 2009 and 2010, the Federal and State governments offered tax incentive and even rebates on home purchases.    This seemed to spur demand primarily for the new homeowners and primarily in the lower end of the market.   The effect was to increase sales.   Indirectly, it also helped to boost sales prices of lower end home.    For the Federal program, the homeowner was required to stay in their home for a minimum of 3 years to keep the credit.   A homeowner selling the home before that time would be subject to repaying the tax credit.  

We cannot reasonably expect unemployed or under-employed people to be able to buy a home.  We also are reducing the pools of people who can even qualify for a home.   Homeowners who are underwater or nearly underwater cannot afford to change homes.   Their best strategy if they can is to continue to make their monthly payments and hope that they can continue until home values improve.    People who have taken advantage of the incentive programs cannot be expected to buy a new home for 3 years.  

Many of these factors will overlap.  But considering them together, it is not hard to get to a qualified pool of home buyers of about 50% of what there was a few years ago.  

The key to this problem is jobs.   All of the other factors will fall into place when the job market improves.   The latest estimates I have heard is that although there is evidence of overall improvement in the economy, economists do not see the labor market improving for 2 to 3 more years.

Although I hate to do a column of grim news, the important thing for consumers to know is that in this environment, real estate strategies are different from when we are in times of high cotton.   Standard strategies of boom times simply aren't effective when you are in a bust cycle.

If you have a real estate question or property you would like to discuss, give me a call.  

Thanks so much.   Have great (albeit chilly) day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299