Dead bodies lie on the housing market fields

This morning the National Association of Home Builders announced that its housing market index was 16 for the month of January.  That is the third consecutive month of a reading of 16.  But what does this mean?

Analysis: The index is essentially a measure of the confidence of home builders as regards the housing market.  A value over 50 means that a majority of the NAHB’s members feel good about the housing market.  So a reading of 16 is an indication of grim prospects for the housing industry.  It has been almost five years since this index had a value over 50, and I’m afraid it will be another 18-24 months before it exceeds that level.  Why?

My reasoning is that there is still massive housing inventory in the United States.  That is, houses that are on the market for sale.  These homes are composed of:

1.  The normal number of homes for sale.  These are the homes of folks who are moving some place else.  This could be because they want to upgrade their current house, downgrade their current house, move to a different neighborhood, or are relocating.

2.  Foreclosures.  This is inventory arising from the unfortunate situation in which people couldn’t or wouldn’t pay their mortgage and so have lost their house.  The number of these houses is still growing.

3.  Unsold inventory from the bubble.  Many home builders built speculative houses during the boom years.  These were houses that they built in anticipation of finding a buyer.  At the time this strategy made sense because builders were having a hard time keeping up with demand.  Again, unfortunately, there are huge numbers of these unsold houses awaiting a buyer.

4.  Second and third homes for sale.  Folks with slightly fatter check books often bought second or third homes during the massive real estate bubble.  Now they either can no longer afford them, or want not to have them.  Either way, there are large numbers of these houses still hanging around in inventory, too.

So we are in an economics 101 scenario here.  What happens when there is way too much supply of a good relative to its demand?  Prices fall.  In other words, there are lots of dead bodies lying on the housing market battle fields.  It is going to take a long time to clear the bodies.

Importance grade: 6; many economic participants have adjusted to the new reality: housing is not nearly as important to the economy as it was 5 years ago.  That means that the carnage in the housing market has already been absorbed by most businesses and individuals.  So the importance of the news about the NAHB index is much less severe than it would have been in the past.

Jason