Construction Crashes to a Halt. Commerce Department numbers indicate new home construction continues to be anemic. Housing starts fell 23.9% in April compared with a year earlier, and fell well short of forecasts for 569,000. Permits also fell 4.0%, further indicating developers and builders aren’t too eager to get back into the market.
Builders Burdened by Inflation. As if builders needed another deterrent, commodity prices are making construction much more expensive. Take copper, which is widely used for electrical wiring and plumbing in residential construction. Though the metal has rolled back from a new record set in February, copper prices have more than doubled since early 2009 levels. Paul Dales of Capital Economics recently told the Wall Street Journal that “in the year to April the cost of residential buildings materials rose by 7.2%. That’s the sharpest increase since October 2008.”
Existing Home Sales Slide. According to HUD and the Census Bureau, existing home sales fell about 1% in April to 5.05 million units (seasonally adjusted and annualized). In the latest month, existing sales were nearly 13% below last April. It’s worth noting that last April there was the soon-to-expire tax credit spurring some buying, but it’s naive to say that’s the sole driver of the dip. The inventory of existing homes rose again to 9.2 months worth of sales, up from 8.3 months of inventory in March.
Interest Rates Must Rise. The precarious position of the Federal Reserve warrants an entire article, not just a paragraph. Maybe I’ll write that article soon — but suffice to say that the Fed funds rate has been effectively zero since the end of 2008 and cannot stay that low forever. And when it does increase, mortgage rates will rise in kind and make the cost of homeownership even less attractive. Consider that the difference (very roughly) between a 5% interest rate and a 6% rate on a $200,000 home sale adds over $100 for each monthly payment and about $44,000 in extra interest across the life of a 30-year mortgage. The difference between 5% and 7% is about $250 a month and almost $90,000 in extra interest over 30 years. That’s not chump change.
For the record, I do not think that homeownership is a purely financial equation. As I wrote in a recent column, there are many regular Americans who bought a house because of the school district or proximity to their family or job. Greed and speculators got us into this mess – but if you are basing a decision to buy solely on the “investment potential” of buying a home right now, your state of mind may not be all that different from the irresponsible borrowers and lenders that caused the sub-prime crash. (Read my full opinion on the true value of homeownership here.)
That said, it’s impossible to ignore the potential downside to home prices right now. Admittedly, the prospect of decreasing home values should not be the only factor in your decision to buy a house – but you darn well better take it into consideration.