Next Stage of the Housing Meltdown

It took the homebuilders a long time, but they may finally be figuring out that they're in for a long, painful downturn. Their problem all along has been that they were building far to many homes for the nation's needs. The homes were selling well, up until late 2005 as speculators bought homes to flip or rent out and baby boomers bought retirement homes in advance with the help of low interest rates. But just as those trends were reaching saturation, builders got greedy and greatly expanded their inventory of land and communities under development. Rather than hold off on development as buying slowed, they rushed ahead with projects in the hopes that the customers would return in large numbers. When that didn't materialize, it took a long time for most builders to figure out that they were facing a long term liquidity crisis based on having too much debt and inventory that they can't easily sell.

Judging by the April Existing and New Home Sales numbers, it appears that reality has finally set in and builders are slashing prices to move inventory. New Home Sales numbers were up substantially in April from the first three months of the year on much lower sales prices, and inventory of finished new homes was down as well:


We probably haven't seen the peak yet, as the biggest rise in finished unsold homes usually comes in the second half of the year, but it's progress. The current group of finished homes for sale have been completed for 6 months, up from 3.9 a year ago, suggesting that not as many new finished homes are joining the group and bringing down the average. Meanwhile, the median price of new homes sold fell from $257,600 to $229,100 likely reflecting big price drops to move inventory. (I've heard of $220,000 price cuts in the Sacramento area.)

If builders have finally shifted into price cutting mode then it shouldn't take long for price cuts to hit the Existing Home Sales numbers. Today's release reflects sales made a month or two ago, but the inventory numbers are current and they jumped from 3.806 million homes for sale to 4.2 million. With an 8.4 month supply sellers are going to have to get more aggressive if they want to unload their homes.

The biggest sellers are now the mortgage lenders who've had to foreclose on large numbers of homes. Countrywide financial had over 8,000 properties listed for sale on their site as of 5/22/07, with total listed prices over $1.5 billion. Looking county by county at RealtyTrac yields some amazing "bank owned" numbers (5,706 in Sacramento County, CA for example and 11,578 in Los Angeles county). These guys probably have the most to lose from a drop in prices, as they've mostly avoided taking charges throughout the mortgage crisis so far. Their ability to get financing depends on an appearance of solvency.

As we head into the next phase of the housing downturn, we should see prices decline more rapidly in most areas, with builders leading the charge, followed by desperate homeowners (there are enough of them still out there with equity to preserve if they can avoid foreclosure with a sale). I still expect most lenders to drag their feet on lowering prices, and the ones who are getting liquidated are most likely the ones bringing large numbers of homes to auction these days.