New vs Existing Home Sale Gap
Calculated Risk posted this interesting chart showing the difference between the degree of pressure on Existing vs New Homes.
It raises an interesting quandry: On the one hand, new home sales contribute directly to GDP data. Ont he other hand, existing homes sales are much larger percentage of the market.
Where I may diverge somewhat from CR is in whether New Home Sales have bottomed. The volume will be a function of price. Ongoing job losses, increased foreclosures, and the offset by (pricey and only partially effective) tax credits will determine if prices are artificially propped up.
Builders looking to move New Homes at a heavily discounted price are sometimes constrained by other factors — bank financing, investor requirements, and recent (nearby) New Home buyers sometimes cause pricing issues. These can prevent builders from dropping prices to compete with local existing home sales — especially in areas where there have been mucho foreclosures.
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The Distressing Gap
Chart courtesy of CR
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October 30th, 2009 at 11:40 am
Barry, I think this is an interesting topic. I keep hearing policy makers expressing relief that existing home sales are increasing – and like you, I’m much more focused on new home sales (because that adds far more to the economy). I think existing home sales will eventually fall further – and that won’t be a bad thing for the economy.
On new home sales – I don’t think there is anyway to call the bottom perfectly. Some people will always want a new home, so sales won’t fall to zero. My guess is we’ve seen the bottom, but we won’t really know until we have a sustained recovery.
October 30th, 2009 at 12:12 pm
The shadow inventory of homes (new and existing) is creating artificially low supply. As there is no free lunch, the result of this artifice will manifest itself elsewhere in the economy (keep your eye on the banks — including the Fed and it’s member banks included – they’re holding depreciating and physically deteriorating assets, and defaults on RRE and CRE loans will continue to rise).
As everybody knows, you should buy now or be priced out forever.
October 30th, 2009 at 12:13 pm
@MA: That’s funny. I want to do just the opposite, sell now and get the heck out of dodge. Maybe the tax credit extension will give us that escape route that I’m looking for next spring? By then I’m guessing probably not but one never knows how long this can go.
October 30th, 2009 at 12:21 pm
BR at top “new home sales contribute directly to GDP data. On the other hand, existing homes sales are” .. paper pushers jobs in that on the other hand of blue collar jobs
as CNBC shows chart of hooks in todays trading .. dollar up stocks down ..
I yell at the screen “paper pushers need jobs too”
October 30th, 2009 at 12:29 pm
Oh Well, less homes around with toxic sheet rock from China.
I know of families who have suffered illnesses from it. Big homes $500k or more vacant unles they remove all the walls and start over.
Can you imagine moving into a brand new sqeaky “clean” home, only to become ill from the walls around you
October 30th, 2009 at 12:34 pm
There is significantly less new homes inventory out there than existing homes, so less sales…
October 30th, 2009 at 12:40 pm
Some of the new homes built with a stucco finish over the last 20 years in the South were faulty and that company, builder, had to be sued to make it right. Of course, they were bankrupted. Why I say that is due to the comment about bad sheet rock; builders have been building inferior product with bad materials and even worse craftsmanship for a while. Not all builders, but many, and particularly at the low end. My own home, built in 1998, is an example of marginal materials, equipment, and labor.
That being said, the low-end of the housing price structure still endures. The house next door sold 1 month ago for a gain for those owners, who had been there since 2002. We are the second owners of our home. I believe we could sell for a miniscule gain over what we paid in late 03. But paying a 5 7/8 note for 7 years helps one build a little more equity, now, doesn’t it.
October 30th, 2009 at 12:45 pm
I have this suspicion that the existing home sales are mostly condos rather than single-family homes and don’t represent as much divergence as the chart implies. I base this on some cursory analysis: 1) 45% of buyers in the last year are first-time buyers meaning young and without a lot of purchasing power, 2) the $8k credit is a much higher portion of the down payment for a condo (nearly 10% in many places) compared to a home, and 3) a lot of the increase has been in the West but California median homes prices are far above the supposed now median existing home sale price of $174k–but Condos are in that range.
I admit the above is more back of the envelope than a serious analysis but it just “feel” right in explaining the divergence.
October 30th, 2009 at 12:49 pm
Hey, Manny,
That last line was a joke/sarcasm. I don’t think we’ve seen the bottom in new or existing homes.
October 30th, 2009 at 12:50 pm
I guess the euphoria over yesterday’s “great” GDP number was, ahem, short-lived. Seems like a “healthy” market to me.
October 30th, 2009 at 12:52 pm
@MA: Oh, I know it was. Was just giving my two cents.
October 30th, 2009 at 12:52 pm
Sucker’s Rally yesterday–the shallow thinkers got duped into taking some over-priced equities off deep thinker’s hands. Darwin’s spirit is alive and well on Wall Street.
October 30th, 2009 at 12:54 pm
advocatusdiaboli
If you look at the price points of exsisting homes you’ll see that the low end has a bulge a lot of working class young people are buying homes under a 150k.
They don’t think they need to live in a “Hip” area and will fix it up.
By the way if you ever hear “Hip area” in refference to a real estate purchase run the other way.
October 30th, 2009 at 12:56 pm
today is the last day of the fiscal year for many funds. yesterday looks like it was window undressing, a term by Jeff Cooper at M’ville. “some of the big funds pull the plug ahead of quarter end on some of those names that they ran up, forcing their competition to buy. A Buy ‘Em to Bang ‘Em.”
October 30th, 2009 at 12:57 pm
Manny,
When you think about it, it all makes sense. The taxpayer was in debt, we all know why, and the government to it upon itself to basically halt the debt where it was through give-aways and stimulus. This really didn’t lower the debt burden on the consumer, but it sure as hell increased the national debt. Now that some of the stimulus is lessening like CFC, it was “unexpected” to see consumers continue to deleverage…NOT!
All we are doing is increasing national debt……it is all about the endgame. And even Harry has noticed that people are not jumping back on the ” Increase my debt, please!” bandwagon…
October 30th, 2009 at 12:57 pm
Story of the day: decline in consumer spending in September.
Get ready for the next leg down.
(god I hate permabulls)
October 30th, 2009 at 1:03 pm
@WindowWasher:
Sounds reasonable. The local papaers ehre in the SF Bay Area made a big deal about a sudden rise in condo sales–but that’s a local phenomenon most likely. $174k is a 1/3 to a 1/4 of a single-family home in most decent workingmiddle class neighborhoods here but it will buy a condo in those areas. Not in Downtown SF or SJ though. Now I need to take a look at the data dang it. Thanks ;-)
October 30th, 2009 at 1:05 pm
@ Paul Jones:
What I like is that the media always prefaces such downward moves with “unexpectedly” as if anyone following unemployment, hours worked, teh real original consumer sentiment reading, and real wages would be surprised. Zero intelligence cheer leading is rampant.
October 30th, 2009 at 1:15 pm
I’ll repeat my comment from the CR blog…
Looking at the difference between Existing Home Inventory and New Home Inventory I would expect the exact situation we are seeing today. Existing Home inventory is still incredibly high at 4M homes compared to 1M homes in 2001. New Home inventory has come way down, from a high of 500k Homes to 250k today vs. 300k in 2001. New homes and existing homes are pretty much equivalent to a buyer, you may expect to pay a bit less for a similar existing home, and in this environment you would expect to pay even less.
Until the Existing Home inventory is worked through you won’t see this gap close.
October 30th, 2009 at 1:29 pm
There is an obvious reason that new homes aren’t selling and old homes are. It’s called COMMUNITY.
A lot of these new homes don’t work in non-bubble times. Developers built them out in the middle of nowhere so they could avoid zoning laws and minimize their building costs, and advertise them as low-tax because no legacy infastructure existed. Because, uh, no infrastructure existed.
They’re in huge subdivisions out in the middle of nowhere, with nothing around them. A year ago, people were willing to buy the first of these homes, because they believed that “if we inhabit it, they–grocery stores, schools, roads, cellphone reception, desirable neighbors–will come.” And everyone else was willing to build these things because they said “hey, there’s a community of half-million dollar houses nearby, and selling stuff to people with disposable income is our business!” And then the more risk-averse wealthy people then moved in because the place had a grocery store, and they paid a little more becuase the community was a little better than it was for the pioneering wealthy people, and it was what everyone expected would happen. So, for the first couple years, there was this great virtuous cycle where more and more rich people moved in and more and more of the stuff that all people need but only rich communities can afford to build from scratch got built. With, of course, massive tax subsidies every step of the way.
But the problem for new houses is that they ran out of the sort of people who were willing and able to buy half-million dollar houses in the middle of nowhere. For awhile, they were able to keep the music going by selling half-million dollar houses to people who were simply willing to buy such houses. This worked because these people could borrow enough money to spend like people who could afford half-million dollar houses, and the people who built supermarkets and other things believed that this community was, in fact, like most other communities where people lived in half-million dollar houses. But oops, within 6 months of Lehman’s collapse, everybody realized what they should have known all along. That these communities aren’t going to work.
And absent that belief, the whole thing collapses. No one will buy that first house–and nothing can progress beyond the point it was at when the music stopped. If you don’t have a supermarket, it ain’t coming. If your subdivision is 20% sold, it ain’t gonna get to 21%.
And lower prices alone will NOT fix this problem. The person who buys a half-million dollar house for $100,000 is, by definition, the kind of person who cannot afford to maintain a half-million dollar house. And developers have been burned by the collapse of the communities of half-million dollar houses inhabited by people who couldn’t afford them, so they will NEVER build those amenities. Banks are also loath to make these loans because they realize, even if the buyer doesn’t, that selling these houses for $100,000 means this community won’t work. These houses won’t be worth $100,000 a year from now–and people are gonna start defaulting on them because their kids can’t go to school, or their wife can’t deal with the hourlong drive for groceries, or a meth lab moved into the empty house 3 blocks away, and That. Is. It.
The reason used houses are selling is because they are in communities that have already proven they work. The supermarket is there. There’s people there who have been there for 10, 15, 40 years and who are never leaving. Even if housing prices dip, this community won’t change significantly. There will be a place for your kids to go to school. Squatters will not take over half your neighborhood.
These development communities are a disaster. The vast majority of them will fail, but only after burning through as much money as they can suck out of people who are too optimistic or too stupid to know they are just burning their money. THERE IS NO MARKET SOLUTION FOR THESE HOMES.
Seriously, if we’re not willing to consider some extraordinary kinds of public interventions–things like public funds to convert them into multiple family homes, along with significant support to build the amenities needed in a lower-middle class community (schools, proper amenities, some kind of transportation subsidy), we should just burn a lot of these down. That will cost us much less money in the long run.
On the other hand, Fannie and Freddie may still save us. There may, in fact, be enough people who can buy these homes for a quarter-million if they’re backstopped by the feds, and who are willing to take a risk on a place that may totally fail. And that subsidy may make it possible for every other element of the virtuous cycle to work–albeit at a less fancy level. So, you’ll get a wal-mart supermarket instead of a whole foods. And a school that doesn’t have a science lab. And the homes won’t be fashionable, but they’ll be nice and big bones, filled with cheap furniture that’s out of date.
This, of course, demands these homes be decently built. Which is the core worry here. Housing stock of cities could survive hard times because a lot of these things were built well. Owners didn’t need to embark upon major capital projects every year to keep these homes habitable. The Chinese sheet rock problem makes me think we can’t have the same hopes here.
But the new home problem is much, much more complicated than “they’re priced too high.” They don’t have any physical or social infrastructure. And until we start solving this problem–which, again, the market will simply never do–expect them to remain un-sold.
October 30th, 2009 at 1:33 pm
We once walked into a new model home with a huge crack in the celing right down the middle of the living room. I couldn’t believe it. I figured if they were that shoddy I’d be better off buying an existing home that had at least been inspected.
October 30th, 2009 at 1:42 pm
Very well put, theorajones. I agree completely.
October 30th, 2009 at 2:02 pm
Just to add a little anecdotal flavor:
My wife and I are currently looking for a house, and one big reason we aren’t really looking at new homes is because they are often located in nearly vacant subdivisions, stamped out on the landscape like a super-nightmare of suburban hell. That’s just not attractive at all. And we have options: existing homes.
Existing homes tend to have more mature landscaping, some actual thought and care involved in the construction of the home, vibrant communities, etc.
So just based on my sole experience, this surprises me not at all. I would much rather buy a house where I might have to buy a new furnace in a couple years than to live in a half-populated suburban wasteland.
October 30th, 2009 at 2:03 pm
ditto manwich, great read
October 30th, 2009 at 2:31 pm
@theorajones
Nice read.
October 30th, 2009 at 2:38 pm
I’ll add another kudos for theorajones’ thoughtful and insightful comment. The more you analyze what we’ve done in this country for the last couple of decades, the more depressing it is. The misallocation and malinvestment of capital is astounding.
Our infrastructure is falling apart (bridges, water/sewer systems, etc.) while we built loads of crappy, oversized houses. Good job America!
October 30th, 2009 at 2:56 pm
@theorajones:
I really like your holistic take on the home buying issues. But I take issue with this part of your reasoning:
The person who buys a half-million dollar house for $100,000 is, by definition, the kind of person who cannot afford to maintain a half-million dollar house.
Because a half-million dollar house that sells for $100k is, by definition, not a half million dollar house. :-)
Indeed, with bubble-based pricing, it never was a $500k price in terms of any sustainable intrinsic value. And the $100k buyer takes sales data on comps around his/her “bargain” purchase to get a property tax abatement from the municipality in the community.
But that leaves us coming to the same conclusion, but for different reasons. A big reason why these suburban communities are unsustainable is because the bottom is falling out of their tax revenue stream as the bubble deflates. That means a combination of cuts/fee increases for basic services like schools, fire, police, roads and water/sewer.
October 30th, 2009 at 3:38 pm
theorajones I ditto the “you nailed it” comments .. but you didn’t bring TIF (tax increment financing) into your story .. governments passing on receiving property taxes for a number of years as thanks for investing here as opposed to over there .. and I don’t totally get the whole game of that aspect ..
.. that SuperWalMart you mentioned .. ours got sales tax offset benefits for building a brand new store on what was farmland … another tidbit – same entity, 15 miles away, empty storefront, got turned into a temporary school house after a river flood took out the real school … some corps have all the luck / some corps have all the game
October 30th, 2009 at 8:01 pm
I’ll say it again. If you are making 100K, you have a couple kids and cars, you should not be holding more than 300K in mortgage if you want to be saving for retirement.
A lot of people, especially boomers are probably starting to realize that the house will not replace the 10-20K they were suppused to be saving for retirement.
Suddenly there is going to be huge demand for 150-350K homes. And if house prices do not go down enough, we’re going to see a lot of construction of cheaper houses.
But I’m not really worried about that. I think that the credit crisis part 2 will soon be hitting the banking system and forcing them to offload the non-performing loans.
October 30th, 2009 at 8:11 pm
.. that SuperWalMart you mentioned .. ours got sales tax offset
———
I remember reading a few years ago in National Geographic that they couldn’t even find enough people to work in these Wal Marts serving the 500K + suburbs because urban planning was so bad they had forgotten to build housing for minimum wage workers.
October 30th, 2009 at 8:45 pm
Anything built today is a piece of junk. Anything built 20 years ago is a fixed-up piece of junk. Something built 40 years ago might be worth occupying.
Chinese drywall anyone?
October 30th, 2009 at 8:58 pm
Actually, Barry, shouldn’t there be another category called Existing New Homes?
October 31st, 2009 at 7:49 am
In Canada, we’re 3 years behind. Canadians think it’s different up here…
http://www.globeinvestor.com/servlet/story/GI.20091030.escenic_1346308/GIStory/
“Middle-age mortgagors
Canadian consumer debt loads were already heading in a worrisome direction before the crisis. The trend is now accelerating, driven by a large increase in mortgage balances among middle-aged people.
U.S. consumers, chastened by the destruction wrought by their profligacy, have lifted their savings rates to levels above 3 per cent, up from zero ahead of the crisis.
Canadians are going in the other direction. Household debt rose 3.4 per cent in the first half of the year, as personal disposable income fell 0.2 per cent, according to Mr. Tal. The debt-to-income ratio has risen to 140 per cent from 131 per cent in the past year.”
October 31st, 2009 at 8:08 am
There are 2 huge issues that no one talks about.
1. Land appreciates, the structure depreciates unless it is maintained. A large % of houses built in in the last couple of decades are too large for proper maintenance. If we believe emerging markets will be growing and stimulating the world economy, resources will be in huge demand. I doubt homeowners will be able to maintain their houses affordably, unless the number of inhabitants per home increases. Many homes, large and small, will be left vacant as the dust settles.
2. Someone mentioned the lack of community. If it is not working now, imagine with increasing competition for resources.
3. People who should have been saving 10K per year, were buying houses over 500K when they should have been maxing at 300K. This has impacted the entire supply chain.
4. How are the young people starting out supposed to afford 300K houses when they start life with 50-100K in education debt? Many bachelors programs are not profitable anymore. The long term income and the potential for saving is not worth the cost. If the students take on debt, they will never save fore retirement, unless the house prices drop. If the parents pay for it, chances are they are tappingit onto the mortgage or reducing their reitrement savings.
And that is why I called it a bubble, yes it’s a subset of the credit bubble, but it is a bubble none so less because over a couple of decades, a major part of this sector was developed to unsustainable levels, financially and socially. And this problen has made its way through the entire system.
Here we have it, a population that never sat down and did the math. Why? Because the majority would not even know where to start.
October 31st, 2009 at 10:20 am
re: Chinese Drywall
http://www.chinesedrywall.com/
http://www.thechinesedrywalllawyer.com/ as always, we should wonder when the TLA comes under attack –Trial Lawyers Association
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Chinese+Drywall
–looks like this, too, will turn into, yet, another “Taxpayer”-funded Bailout..
November 1st, 2009 at 3:13 pm
I’m kind of disappointed in the article and comments. The last two years’ reduction in new homes sold implies nothing about new home demand if the supply of new homes being built has been reduced. To reach the reassuring “it can’t happen in my existing home neighborhood” conclusion, there’d need to be some sign that new homes are selling less well where offered. For instance, is the month’s supply for new homes trending up vs. existing homes?
BTW, I agree with the points about less-than-critical-mass subdivisions, declining home quality (or durability, at least), etc. I just don’t see the evidence that new homes have stopped selling, as opposed to stopped being built.
I did like Calculated Risk’s original point that as far as jobs, GDP growth, etc. a new home sold is worth more than one existing home sale.