Wednesday, September 19, 2007

Light At The End of The Tunnel...Part II

The Commerce Department released its monthly Housing report for August today. To no one's surprise, it was a little bit negative, with US housing starts decreasing by 2.6%. Building permits also came in a little low, falling off by 5.9%. At first glance, the numbers seem pretty bad, but there's a good in just about everything.

The numbers indicate a weakening in future residential construction in the US. That's ok, because everbody expects this to happen. Foreclosures are on the rise, adding to the glut of excess inventory in the market, where there is a 9.2 month supply of single-family homes. This has to sell off in order for the housing market to rebound. Prices also must fall. It is how the markets work. If supply exceeds demand, something has to give in order for the market to reach a state of equilibrium. Prices will fall. Inventories will fall as a result. There is evidence clearly suggesting that we are in the midst of this normal correction. According to the widely regarded Case-Shiller Home Price Index, home prices fell an average of 3.2% in the second quarter, and it will likely continue until inventories have been reduced sufficiently.

To further our bullish sentiment on real estate, falling interest rates will once again spur demand for housing. And as we all know, the Fed cut its benchmark rate by 0.5% yesterday, to 4.75%. Banks can now lend money to potential home-seekers at lower interest rates, which in turn, will provide steam for our economic engine.

Although this will all happen over the course of years, not weeks or months, the future seems bright for a heavily beaten-down sector. If only we can get out of it alive...

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