January 27, 2004

Homes Boom Again

The housing market just keeps surging forward. Yesterday, the National Association of Realtors (NAR) said that December existing home sales rose by nearly 7%. And for the year, sales of existing homes made a new record. 6.1 million existing homes were sold in 2003, beating 2002’s mark of 5.56 million. Prices also rose at 7.5%, the fastest rate since 1980 (11.7%). And from what the NAR says…demand for housing is robust. In fact, NAR’s David Lereah says that, “the reason we have such strong price appreciation is because we’ve got lean inventories.” By inventories, he’s referring to the supply existing homes. And by NAR’s count, inventories fell 7.3% in December. That leaves 4.3 months supply at the current sales rate. Based on those numbers, there’s no reason to think housing prices couldn’t keep going up…and that home sales will stay strong in 2004. Supply, it seems, is barely keeping up with demand. And tomorrow, we’ll find probably find out that new home sales were up in December too. Most economists surveyed by Reuters are expecting December’s numbers to come in over 1 million units. All of this is pretty convincing…if you don’t look beyond the surface. The surface argument is simple and compelling. Housing demand is strong. In fact, supply can hardly keep up with it. Home prices are rising and rates are low. The boom will continue, driven by new buyers, refinancing at low rates, and demographics (esp. boomers buying second homes.) Underneath the surface, though, is an economic reality: housing activity is strong because money is cheap. It all hinges on low interest rates. I won’t recap all the details I’ve gone through over the last few weeks. But the kernel of my observation is that the housing market is not being driven by normal, sustainable, affordable growth. It’s being driven by a credit binge…where the newest buyers are the biggest credit risks. In other words, if you just looked at the supply dynamic, you might be convinced everything is fine. But the closer you look at demand, you see that it’s been artificially stimulated. And that can’t last forever.


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