Friday, October 15, 2010

Thinking Out Loud On Housing

Consider the following facts.

Absolute new home inventory is at very low levels:

The savings rate is high -- people are tucking away more of their paycheck.

The financial services obligation ratio is decreasing, indicating consumers have more room for debt payments.

Mortgage rates are incredibly low.

Prices are becoming compelling.

Sales of new homes are currently at low levels. However, suppose we start to see good job creation for a period of 3-4 months; that is job creation in the 150,000-200,000 range. Or, more generally, we see enough job growth to increase confidence so people start buying houses again.

Two questions:

To what degree are existing homes and new homes substitute goods -- that is, to what extent will people who wanted a new home buy a lower priced existing home?

Is this enough of a bump to demand for home builders to ramp up production again?