February 18, 2004

Overbuilding, Underbuying

The Commerce Department reports that January housing starts were down nearly 8% from December's record. Meanwhile, the Mortgage Bankers Association reports that its purchase index, a measure of new loan requests, was up 2.9%. And finally, the National Homebuilders Association reports that its Housing Index, a measure of sentiment in homebuilders, fell from 69 to 65. At the very least, it seems like housing activity--both building and buying--are coming off record levels. But one month does not a bust make. Still, you're starting to see signs that interest rate sensitive demand might be slowing while home building supply keeps increasing. As Scott Winningham, an economist at Stone and McCarthy Research Associates said in a Reuters article, "There's a growing divergence between new home sales, and homes being started and those still on the market." The Fed doesn't figure to raise rates anytime soon. So you may well see mortgage rates remain relatively low, even historically low. Then we'll just have to see if the low-rates continue to attract new buyers. Demand is a function of affordability. And with incomes already under pressure (see Faber charts below), will 2 million new buyers a year keep stepping up to the plate to buy their first home?


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