Sales of new homes unexpectedly fell last month (January), even though economists thought sales would increase. This is yet another sign that the home purchase tax credit is not reigniting demand. These numbers also give credence to the notion that the economic recovery is still in its early stages. What is robbing demand for new homes is a new wave of foreclosures that is flooding the market with supply. Simple economic theory holds that when supply is increased, prices fall. This fact, coupled with the decrease in demand caused by job loss, hard to find credit, and low consumer confidence all translates to a long arduous recovery in the housing market. The decrease in demand and increase in supply also equates to a decrease in the average selling prices of homes nationwide.
It will take several years for the housing market to finally correct itself. Record default rates continue and will impose a giant hurdle for any housing market recovery. As mortgage default rates increase, so do foreclosure rates, so do supply rates, and so does the decline of the average selling prices for homes. This year alone, RealtyTrac, Inc., estimates that over 3 million homes will be repossessed by banks. Borrowers suffering from job loss, depreciation in the value of their homes, and an inability to sell, will add to those foreclosure numbers. Based upon the statistics, expect to see further decline in new home sales and a continued decrease in home sale prices.
Right now is a good time to buy, but a bad time to sell. Keep in mind, however, depending upon which section of the U.S. you find yourself, changes in demand or supply may vary. For example, in Maryland home markets situated near U.S. Military installations will see a spike in demand for housing as the Military completes its base realignment initiative (BRAC). In those markets, sale prices will remain stable or increase as military personnel stream into Maryland in search of housing.
Nationwide, however, the situation looks bleak. A recovery in the job market and a dwindling of the foreclosure supply must occur before we see a rebound in the housing market. By my estimates, it will take another 3 to 5 years before a sense of normalcy returns to the housing market.