Housing Sector Update

Straight from NYU finance professor Nouriel Roubini’s blog (the RGE monitor), here is the latest update on the housing sector:

The fourth year of housing recession – and the worst housing recession since the Great Depression – is well on course.

Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 466 thousand SAAR of January 2009 (the last data point available), an all time low for the time series that started in January 1959. Single-family starts built for sale are down 81% from their Q1 2006 peak (since seasonally adjusted data is not available, we performed our own seasonal adjustment).

On the demand side, new single-family home sales are down 76% from their July 2005 peak. Both demand and supply of homes are therefore still falling very sharply which does not bode well for inventories. Inventories are the mortal enemy of prices for any goods-producing sector, including housing.

The sharp and unprecedented fall of starts might not have reached a bottom yet. In this economy-wide recession, weakness on the demand side of housing is bound to persist and we believe that supply will have to fall further, given the great wave of foreclosures that is adding to the excess of supply in the market.

We believe that home prices will not bottom out until the middle of 2010. Our target is a 38% peak to trough (so far prices have fallen over 27% from the peak) but given the worsening conditions on the real side of the economy, we see a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006 (Case-Shiller is the reference index for these predictions.)

Thats a pretty dismal outlook! The condo that I was living in last year that went into foreclosure is on the market, listed for close to what it was worth in 2002-end. And there’s a chance prices may fall further still.

Property prices in many cities have reached very attractive valuations. But it doesn’t mean they’ve found a bottom. Prices typically over-correct on the downside and drop until they become ridiculously cheap. Just check out the deals you can buy for under $5,000!.

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