Monday, December 26, 2005

The Housing Bubble Is Leaking Badly: New Home Sales Plummet in November

Sales of new homes plunged in November by the largest amount in nearly 12 years, providing the most dramatic evidence yet that the red hot housing market over the last five years is starting to cool down.
The Commerce Department reported Friday that new single-family homes were sold at a seasonally adjusted annual rate of 1.245 million units last month, a drop of 11.3 percent from October, when sales had surged to an all-time high.
Last month's decline was even bigger than the 8.7 percent drop-off that Wall Street analysts had been expecting. While sales of both new and existing homes are still on track to set records for a fifth straight year in 2005, analysts are forecasting sales will decline in 2006 as the housing boom quiets down.
Analysts are looking for home sales to dip by around 6 percent next year under the impact of rising mortgage rates. Analysts believe that house prices, which had been soaring at double digit rates, will moderate as well.
Some of that price moderation was evidenced in the November report, which showed that the median price of a new home sold was $225,200 last month. That was up just 0.3 percent from November 2004, the weakest year-over-year price change in two years. The November median price was down 4.1 percent from the October median sales price of $234,800.
In other economic news, the Commerce Department reported that orders to U.S. factories for big-ticket manufactured goods jumped to a record $223 billion in November. That was a 4.4 percent increase from October, representing the largest percentage advance in six months. Orders for durable goods had risen 3 percent in October.
The gain in demand for durable goods was far above the 1.1 percent increase Wall Street analysts had been expecting. But the strength was concentrated in a surge in demand for commercial aircraft, which shot up 133.8 percent to $25.9 billion from $11.1 billion the previous month.
Outside of this area, manufacturing demand was weak. Excluding transportation, durable goods orders dropped by 0.6 percent, the third straight monthly decline in these categories.
Some economists are worried that housing prices in some areas have been driven higher by a speculative frenzy that could see prices plunging as sales slow in the hottest markets. That scenario would evoke memories of the sharp declines that occurred when the stock market bubble burst in early 2000.
But other economists contend that housing is unlikely to exhibit the same collapse that the stock market did although they believe that the declines in sales expected next year will act as a drag on the overall economy.
By area of the country, sales were actually up by 13.4 percent in the Northeast, the biggest percentage increase in this region since January 1994.
However, sales fell in all other areas, led by a 22.1 percent drop in the West, the biggest decline in this region since February 1995. Sales were down 18.3 percent in the Midwest and fell 5.5 percent in the South.
The 4.4 percent rise in orders for durable goods, items expected to last at least three years, was the largest one-month advance since a 7.3 percent rise last May.
Analysts had expected a big gain in aircraft orders because of the sales success Boeing Co. had at the Dubai air show. Analysts said that Boeing booked 148 new plane orders for the month compared to 36 orders in October.
Orders for all types of transportation products were up 15.6 percent as the strength in commercial aircraft was offset by a 5.7 percent drop in orders for motor vehicles and parts and demand for military aircraft fell 44.3 percent.
Orders for non-defense capital goods, seen as a good barometer of business plans to expand and modernize, rose by 19.6 percent, but all of that strength was in the surge in aircraft orders. Excluding aircraft, non-defense capital goods actually fell by 2 percent last month.
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The End Of The Real Estate Boom
An excerpt from Paul Van Eeden's column at Kitco:
December 25, 2005
The US economic expansion probably would have ended somewhere in the mid-1990s were it not for the influx of foreign capital due to numerous currency crises during that decade. The general stock market had already run out of steam by 1999 and by 2001 it looked like the market might collapse, dragging the US economy with it. Aggressive interest rates reductions prevented a collapse by fueling a real estate boom that kept both the stock market and the economy on life support. But now it seems that even the real estate market can take no more. Earlier this month we learned that the inventory of homes for sale had reached the highest level in 19 years, and housing affordability was at a 14-year low. This week there is yet another article in the Wall Street Journal about housing affordability.
According to a study prepared by Moody's Economy.com for the Wall Street Journal, housing affordability fell almost 9% in the third quarter from a year ago. In some markets, affordability declined by more than 20%. On a percentage basis you have to go back 25 years to find a decline in affordability as significant as this.
Earlier I read that there is not one county in the entire United States where a person working full time, earning minimum wages, can afford to rent a one-bedroom apartment. But it is not only lower income families that are having accommodation problems: even middle to upper income families find it difficult to move up. In some areas of the country, such as New York, Los Angeles, San Diego, San Francisco and Miami, affordability has declined to levels not seen since the '80s.
According to the Mortgage Bankers Association, mortgage applications are at their lowest level in almost a year. Also, home ownership has started declining from the record 69.4% reached in the second quarter of 2004 and now stands at 68.7%. It may not be a large decline, yet, but it certainly signals the effect that rising house prices and rising mortgage rates are having on homebuyers.
I do not believe this is a trivial matter, which is why I have dedicated so much time to writing about the real estate market. As the real estate market goes, so goes the economy and the stock market. The only thing that could keep the US on life support a little longer is another round of interest rate reductions, but this time it could hurt the dollar, and that would mean higher gasoline prices again, so it's a double-edged sword.
http://www.kitco.com/weekly/paulvaneeden/dec252005.html

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