New home sales in 2008 hit record low

By now it shouldn't come as any surprise that new home sales in 2008 fell to a record low of 331,000 annualized sales by December. Yet because the sales are so low, it would still take nearly 13 months to burn off the existing inventory (although some economists would argue that the time line for market equilibrium of new versus existing homes aren't the same because it takes much longer for home builders to create the product to sell). From a Washington Post story:

Builders cut production and prices but are competing against a backlog of foreclosed properties that are selling at significant discounts, economists said. Until more buyers venture back into the market, prices will continue to fall and sales will remain slow, they said.

In December, new-home sales tumbled 15 percent compared with November, to an annualized rate of 331,000 sales, and were down 44.8 percent compared with December 2007, according to the Commerce Department. For all of 2008, builders unloaded 482,000 new single-family houses, down 37.8 percent from 2007. That is the biggest year-over-year sales decline on records that go back to 1963...

Meanwhile, prices have tumbled to 2004 levels. The nationwide median sales price fell 9.3 percent, to $206,500, in December from $227,700 a year earlier, the biggest drop since 1970. For the year, prices fell about 7 percent, to $230,600, from $247,900 in 2007.

Despite industry efforts to cut supply and prices, there are still far more homes than buyers. It would take 12.9 months to sell all the homes on the market at the current rate, according to the Commerce Department. That is the worst sales rate on record...

The current number of homes for sale might have been acceptable two or three years ago, but the sales rate was much faster then, economists said. While new homes await buyers, existing homes in pockets of the country are being snapped up by bargain hunters, according to industry data released earlier this week. But that market is being fueled by foreclosed homes and distressed sellers that have dragged down prices...

The future of the the California economy

The 1990s recession in Southern California was bad -- so bad, in fact, that people were wondering if the state's economy would ever fully rebound. I'm now hearing those voices rise again, although this time the reasons are more numerous. From a column by Steve Perlstein at The Washington Post:

The recession hit here earlier and harder than the rest of the country -- the statewide unemployment rate topped 10 percent last month -- and chances are it will linger here longer.

The severe downturn reflects the region's central role in the Bubble Economy.

As the headquarters for Countrywide Financial, Washington Mutual, New Century Financial and IndyMac, along with several of the nation's largest home builders, Southern California is ground zero for the mortgage crisis and the residential real estate bust.

As the capital of conspicuous consumption, its heavy reliance on auto sales, fashion, electronics and entertainment is now out of sync with the country's new frugality.

And as the gateway through which a majority of the country's imports flowed from Asia to American homes and businesses, its ports, warehouses and distribution channels, which once strained to keep up with the volume, now find themselves with large amounts of unused capacity.

More significantly, the receding economic tide has revealed serious structural problems and challenges in key sectors. The music, entertainment and electronic gaming industries are being turned upside down by the Internet.

The real estate industry is bumping up against the limits of population growth and exurban sprawl. And state and local governments that have long financed themselves by pushing costs off into the future have finally met their day of reckoning...

It is hard to overstate how reliant the Southern California economy has always been on population growth to drive its economic growth -- in oversimplified terms, building houses for the next wave of home builders...

But in recent years, this perpetual growth machine has pretty much run out of steam as residents old and new confronted the realities of two-hour commutes, bad air, a shortage of water and a backlash against illegal immigration.

Moreover, without the steady growth in tax revenue that came with population growth, the Ponzi scheme that passes for public finance in California was suddenly and painfully revealed. Much of the blame lies with public employee unions and a handful of other special-interest groups that have essentially hijacked political control of state and local governments.

Now, despite decades of high taxes and rapid growth, state and local governments find that they not only don't have the revenue to provide even basic services, but are saddled with hundreds of billions of dollars in unfunded pension liabilities and infrastructure needs...

Clearly, no matter how well the economy rebounds, the future cannot be business as usual.

Click here for the entire column.

House Republicans float own housing plan

House Republicans floated their own plan to help boost the housing market with the use of tax credits while also cracking down more on mortgage fraud (which is still very much a problem). From a Washington Post story:

Under the proposal, borrowers refinancing their mortgage would be eligible for $5,000 to help cover closing costs or to reduce their principal balance. The plan also revives a $15,000 home buyer tax credit proposal that Republicans pushed last year. This time, the proposal would require the borrower to have at least a 5 percent down payment. Both programs would expire in July 2010...

The Republican proposal also calls for providing additional resources to law enforcement agencies, including the FBI, to investigate and prosecute mortgage fraud. According to a recent study by the Mortgage Asset Research Institute, mortgage fraud jumped by 26 percent last year compared with 2007 even though fewer loans were issued nationally.

Republicans have not attached a price tag to their proposal and it is unclear whether they could gather enough support from Democrats to move the measure ahead.

The plight of 'rebound renters'

For those considering joining the 'jingle mail' crowd and thinking that they'll simply move out and find a rental home elsewhere, a story in The Washington Post reminds readers of the pitfalls of renting:

Foreclosures have doubled over the last year, which means a lot of former homeowners are becoming renters again for the first time in a long time. And there are new lessons to learn: You're not quite the master of your own domain, because you lease the property instead of owning it. You have to live by the landlord's or building's rules and regulations. And you have to remember to change your insurance coverage.

And, on the Lansner on Real Estate blog, he cites at National Multi Housing Council study that concludes most foreclosure 'refugees' are not looking for apartments managed by large companies, but individual homes owned by individuals. And why is that? Some reasons:

Experts have several theories about why there hasn’t been a flood of foreclosure refugees into apartments:

• Foreclosures may involve investment properties
• Some are renting houses rather than apartments
• Those with credit problems are applying for units that don’t screen applicants
• They could be moving in with family...

“Given that foreclosures take time and that additional pressure will be put on financially burdened homeowners as adjustable-rate mortgages continue to reset in 2008 and 2009, it is reasonable to expect the number of applicants with foreclosures to continue to increase, perhaps dramatically, from current levels,” said the report.

The end of cheap credit

Even when newspaper and magazine articles were following the rise of cheap debt, they still acknowledged that it would someday come to an end. That end may be here, so what does it mean? From a Washington Post article:

Mounting turmoil in credit markets could realign the finances of households and businesses, as banks scramble to bolster their balance sheets and jettison risky customers.

For consumers, it could mean fewer credit card offers. For home buyers, it will mean tougher mortgage conditions. For many businesses, it will mean a substantial increase in borrowing costs and possible postponement of capital spending plans...

While most economists have long said that Americans need to borrow less and live within their means, the sudden, lurching nature of recent financial markets isn't what most of them had envisioned....

Commercial real estate firms are also in danger if they have relied heavily on borrowed funds for projects still underway.

"It seems that the huge economy of the United States is getting a huge margin call from the whole world," said one investment banker who spoke on condition of anonymity because he was not authorized to speak on behalf of his firm.