Thursday, December 28, 2006

Worst May Not Be Over For Housing

From Bloomberg:

In a Nov. 27 comment, Rosenberg notes that in addition to the record 4.3 million residential units for sale as of October, there were 1.95 million home completions, the 12th-highest month since 1979. Units under construction were through the roof as well. Rather than seeing supply dwindle and prices start to firm up in early 2007, Rosenberg says ``it could be a year before the reduction in starts begins to put a meaningful dent into the inventory backlog.''

John Mauldin, an investment adviser and frequent contributor to Investors Insight, a financial-data publisher, throws an extra log on the fire. According to Mauldin, even the current projection of housing sales may be overstated and thus the existing supply of homes greater than what is reported in the official data. The reason is that the Census Bureau, one of the Commerce Department's statistical agencies, fails to account for cancellations in home sales contracts. Cancellations ran as high as 40 percent for some major homebuilding firms last quarter.

The high amount of inventory -- especially of existing homes which has been running over 7 months since July 2006 -- is very disconcerting. The existing homes market is much larger than the new homes market. A declining sales environment is going to make it harder to work off that inventory, which means price declines may not be over.