Are Fewer New Homes Good For America?
Last week the Commerce Department reported that new home sales fell 11.2 percent in January to a seasonally adjusted annual rate of 309,000 units, the slowest pace on record.
“This disappointing report highlights just how fragile the economic and housing recovery is right now, and the uncertainties that continue to weigh on consumers, particularly with regard to concerns about job security,– said Bob Jones, chairman of the National Association of Home Builders (NAHB). “Even with today’s exceptionally favorable home buying conditions — including low interest rates, stabilizing house prices and the availability of home buyer tax credits — many consumers simply weren’t confident enough to go forward with a new-home purchase in the beginning of this year.”
There’s no question that the latest government numbers are dismal, and no one should rejoice in the damage done to home builders nationwide. That said, fewer new home sales may be a necessary evil.
Warren Buffett
“People,” says billionaire investor Warren Buffett in his latest letter to Berkshire Hathaway shareholders, “thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually. But household formations — the demand side — only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.
“There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers’ program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.
“Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below ‘bubble’ levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.” (emphasis mine)
There’s an odd conflict between what’s good for home builders and what’s good for real estate. We really don’t need more new homes in the sense of supply and demand, but we also don’t want to demolish the homebuilding industry and lose the related jobs and spending. The real solution to these problems is stop the bias against real estate investors. That would bring more buyers and dollars into the marketplace, demand would increase and then more units could be absorbed.
In other words, it all goes back to supply and demand. How rudimentary. How traditional. How unsettling for home builders until we have a more inclusive approach to the real estate marketplace.
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