Housing Inventories Hit Record High

“The backlog of unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years. The Commerce Department reported Monday that sales of new single-family homes dropped by 5 percent to a seasonally adjusted annual rate of 1.233 million units last month. That was the slowest pace since January 2005 and left the number of unsold homes at a record high of 528,000.”

The housing boom is over folks. Inventory data is crucial for real estate. There is no magic formula for calculating fair value of residential housing. You can’t run a discounted cash flow model, or dividend discount model. Housing prices are simply based on supply and demand. And supply is at an all-time high.

Even here in St. Louis, hardly a booming market, I am seeing more and more houses going up for sale, even though others have been on the market for months. Mortgage rates are up and millions of ARM loans readjust this year. Home equity loan rates are also on the rise. Fed Funds will hit 5% this year, which puts the prime rate at 8% and most home equity loan rates at 9%.

It’s not a complex scenario. Supply is high as the inventory numbers show. Interest rates, the cost of money, are going up and will adversely affect demand. Not a good combination. Housing stocks may look attractive with low P/E ratios, but don’t forget why housing stocks always have low multiples; because the cycle always ends.

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4 Thoughts on “Housing Inventories Hit Record High

  1. NO DooDahs on February 27, 2006 at 9:59 PM said:

    I believe that, in a year’s time or somewhat less, the housing stocks will be a value again. Give Bubbles some time to start working again! When the rates start dropping, the boom will reinflate.

    Right now, definitely either stay away or short.

  2. SiamTwin on February 28, 2006 at 5:59 AM said:

    chad – in your opinion, what are implications for other sectors, eg retail, that have been dependent to a great extent on rising home prices and equity extraction from residential property values?

  3. Chad Brand on February 28, 2006 at 8:09 AM said:

    Since I don’t see a nationwide bubble popping, I don’t think you’ll see widespread negative consequences in other sectors.

    Retail is one area that will be affected so I would focus investment in that sector on companies that have strong prospects even if housing prices flatten out or drop 5-10 percent.

    This would primarily affect the lower to middle income shopper, and be less of an influence on the teen/college crowd as well as the ultra high end consumer.

    It will be a headwind, and lower GDP growth will likely result, but I don’t see it being too terrible for any other sectors outside of the housing/construction/mortgage lending group.

  4. SiamTwin on February 28, 2006 at 9:17 AM said:

    appreciate your comments. guess i’m a bit more bearish on the impact than you, but i hope you’re right for the economy’s sake!

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