Building A Foundation On Sand

While there have been improvements at the low end of the residential real estate market as foreclosed homes are being repurchased at, well, basement prices, the entire rest of the housing market is still in a deep depression.

By virtually every measure, the new single-family home market remains in a fairly deep slump:

• Sales of new homes are down 72 percent from their 2005 peak, while existing ones are off 24 percent from their peak a year later.
  
• As a percentage of total sales, new homes are well off their historical average of roughly of 12.5 percent and the 16-percent average share of the 2005-2006 boom period. In 2008, market share was down to 10 percent and is running under 8 percent so far this year.
  
• Inventory, which peaked at 14-3-months of supply in January, is down to 7.9 percent, but still far from the 5.9-percent level of December 2006, right as the market was turning lower.
  
• Housing starts overall are down 71-percent from 2005

“Most builders aren’t putting shovels in the dirt, nor are they going to anytime soon,” says Howard.

“Who knows if we’re at the bottom," adds David Tschetter, CEO of Fort Collins-based Colorado Custom Homes, whose houses average about $500,000. “We been trying to dump inventory.”

Tschetter says he’ll be lucky to build six to ten homes this year, versus a couple dozen in the boom years of 2005-2006.

With numbers like those, virtually every trade group related to real estate and housing are pushing for an expansion of the government’s existing homebuyer’s tax credit, which is now limited to first-time buyers of primary residences and a maximum of $8,000.

As I've said before, even if the number of new housing starts were zero, we still have years worth of a supply of unsold homes on the market, especially in the middle and high end range. The housing depression will continue to shape the economy for several years to come, and homebuilders are going to be in dire trouble throughout all of it. It's going to be a long time before Americans need more new homes, and the more homebuilders put on the market, the longer it will take for the market to recover.

Foreclosures and unemployment will continue to flood the market with unsold homes. We're nowhere near the bottom.

[UPDATE 3:16 PM] Existing home sales experienced a record percentage jump in July. There's a lot of pressure to believe that this is a V-shaped recovery. It's not: it's the only section of the residential real estate market to see a real gain.