The Struggling Housing Market

The first quarter of 2009 was a tough one for the housing sector–no surprise there. The housing market has been in decline for nearly four years now, having hit a price peak in July 2006. The low earnings report from Lowe’s today emphasized that, even though they posted better than expected revenues. Earlier this month Plute Homes President Richard Dugas, Jr., said:

“The operating environment for housing remained very difficult during the first quarter of 2009. The housing market continues to face rising unemployment, tight mortgage availability, increased foreclosure activity and declining home prices, all putting negative pressure on buyer demand.”

And that was echoed by Centex CEO Tim Eller (who does catch one glimmer of hope):

“Housing markets remained challenged throughout the quarter, with the positives of historic affordability and low interest rates offset by rising foreclosures and high resale inventories.”

Of course the “historic affordability” glimmer of hope means prices are rock bottom, which is killing homeowners who now owe more on their mortgages than their home is worth. One study suggests 20% of homeowners are “underwater.” Another study estimates that “…of 78.2 million owner-occupied single-family homes, 14.8 million borrowers, or 19%, owed more than their homes were worth at the end of the first quarter, up from 13.6 million at the end of last year.”

However, the fact that new home inventory is in decline might actually remedy the situation. A decrease of houses on the market should help aid a resurgence in prices, given decreased supply. Hopefully this will help some of those underwater, but the fact is that many of those who owe more than their house is worth bought it at an inflated value. Just because a house is underwater doesn’t necessarily mean its value needs to go back up if it had been priced too high in the first place. Maybe a home purchased for $800K in May 06 is worth more like $600K. Such is the danger with taking out a loan (mortgage) on anything that has fluctuating value.

All, and all, though the housing market doesn’t look pretty, it’s not as grim as it was before. Prices may continue to decline, but they are reflective of what the market will pay.

(HT: Calculated Risk)