The Housing Downswing Still Is Underway

The dramatic downward correction in U.S. housing markets has been underway for nearly two years. Single-family building permits topped out in the fall of 2005 and have declined by 43 percent since then (through June). 

Furthermore, NAHB’s single-family Housing Market Index hit a current-cycle low of 24 in early July, down from a peak of 72 in mid-2005.  The HMI now is down by more than 50% in all four regions of the country, and all three component measures (current and expected sales as well as traffic of prospective buyers) now have values less than half their respective 2005 peaks. 

NAHB’s proprietary survey of 32 large single-family builders (accounting for about 26 percent of single-family home sales last year) shows modest improvements in seasonally-adjusted gross and net sales in both May and June, presumably reflecting aggressive use of sales incentives (including price cuts) by the big companies. 

Despite these improvements, net sales in June were down by 43 percent from their mid-2005 peak and most of the big companies continue to talk about difficult market conditions – including subprime-related tightening of mortgage lending standards and recent increases in prime mortgage rates.

Despite the stunning dimensions of the housing correction to date, the single-family and condo housing markets still are coping with major imbalances that promise to maintain downward pressure on home buying and home building for some time.  First, affordability remains historically low, a problem that’s been aggravated by tighter lending standards in connection with the subprime mortgage debacle and the recent firming-up of prime mortgage rates. 

Second, inventories of vacant homes for sale (new and existing) have climbed to record highs, boosted by homes put back on the market by investors/speculators that had gobbled them up during the 2003-2005 buying frenzy.