Housing: Will Surging Supply Pop the Bubble?


 


            In the recent years, early forecasts of the falling demand for housing are being made. It seems that this was due to the oversupply of houses due to the inaccurate use of the builders’ speculations about it. While they continue to build houses at an increase rate, the demand for housing seems to be not favoring them. A lot of reasons are being made but still they cannot try to figure out the real reason behind it. As the situation continues, a lot of builders not are thinking twice on what actions to make to solve the issue.


            Let us try to look back to the past events to figure this out. During the second half of the year 2005, supply of houses, particularly of new single-family houses is growing at its fastest pace since the middle of 1980s. However, the sales seemed to be not cooperating. It had been gradually slowing down. This made the builders to make some little adjustments to address the issue. Same case happens with multi-family buildings. It is said to be even worse since vacancy rates are at its historically high rates.


            Then in the late 2003, the bump in long-term interest rates arises. The situation now turned upside down. It had reduced the rate of home buying. During this time, inventories continue to rise at relatively low levels. According to Chris Low, a FTN Financial chief economist, “In 2003, it was safe to say that homebuilders had entirely avoided the temptations of speculative building”. He also added that this situation is no longer true today.


 


            In the month of December, construction continues to increase despite the signs of cooler demand. As indicated by the National Association of Realtors, the housing affordability index hit a 14-year low in the month of November. The attractiveness of the adjustable-rate mortgages are being reduced by the higher short-term interest rates.


            Things got even worse when the number of existing homes for sale rises (up to 20.6% from a year ago) as the number of builders continues to rise. This had made the competition stricter than before, despite the bad situation in the market. It was seen that this rise in inventory will hold back the overall appreciation of the prices of homes. As predicted by Fannie Mae, the median price gain goes down to only 3% in 2006. This was after the gain in the recent years, which is said to be in double-digits.


            As the demand for housing stabilizes, speculative activities will evaporate. If only will housing slow down noticeably. In this case, home sales could be posing an even bigger annual decline, worse than the biggest decline to be recorded in fall of the year 1991, which is 6.3%. The result: jobless rate will soon start to increase again as builders continue on ceasing their projects due to their doubts regarding the situation of their market.


            After reviewing the said events, it is therefore concluded that property prices might go down to attract more customers. In this way, they might have an edge to their competitor. As long as it does not incur them losses, prices can be lowered and the additional demand will cover up the possible loss from the said decrease in prices. This is possible as long as they still incur enough profits/gain.




Credit:ivythesis.typepad.com


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