Is there light at the end of the tunnel, or is that just the headlight of an oncoming train? That seems to be the big question in the housing industry today. Each day seems to bring more bad news with no hope in the near future. I recently read a article by Michael Corkery of the Wall Street Journal on line which gives me hope. Mr. Corkery reports that Lennar Corporation, a large national builder, has plans to “moth ball” some of the current projects they are working on. He also reports that Toll Brothers is also considering a similar program. You can read the entire article here.

Why is the so called moth balling of current projects good for the housing industry? It indicates a willingness on the part of builders to attempt to stop or slow down the current downward spiral in pricing. The glut in inventory has been devastating to new and existing home prices across the country. Many builders continued to build well after it became apparent that more homes were not needed. They did this to keep up with land purchase agreements already in place with developers. They also were attempting to maintain market share in a aggressively shrinking market. This additional inventory added pressure for further price reductions. Drop the recent mortgage market problems in the mix and we find ourselves with high inventories and reduced demand. Fewer buyers with the ability to qualify for a home, and fewer sellers willing to sell their home at a loss to move up to a new home resulted in additional downward pressure on prices.

Lower interest rates may make it more palatable for builders to hold on to property until prices start to rise or at least stableize. This will remove some of the excess inventory from the market and help us all. Having a couple of large national builders decide that they have found a threshold of pain they are not willing to go below could be the best news I have seen in a long time.

Say… Maybe that is a light at the end of the tunnel???

Oil at $100.00 a barrel? That seems to be the talk of the day. Is $100.00 a barrel a new tipping point for oil? Will the economy blow right past that benchmark and not even notice? How will these economic factors impact the housing industry? All good questions. Lets break it down.

Higher Oil Prices, Tightened Lending Standards, Runaway Foreclosures

According to Time magazine the demand for oil world wide keeps getting greater. Meanwhile the available supply and our ability to refine that dwindling supply is decreasing. I remember from my first economics class that increasing demand and decreasing supply can only lead to higher prices. Now that we all agree on the direction of oil prices, what does that mean to the US housing market? Two possibilities leap to my mind.

1. Higher oil prices convince the Federal Reserve to fear inflation more than the housing markets woes. This results in no further rate cuts.
2. Higher oil/energy prices hit the tipping point where they push the economy into recession. I can’t imagine a recession ever being good for the housing market.

On Monday CNNMoney .com reported that lending institutions are tightening their underwriting standards. This will lead to a reduction in the supply of money available to potential buyers of new homes.

On November 1st John W Schoen of MSNBC reported that foreclosures increased 30% in the 3rd. quarter of 2007. According to Mr. Schoen 446,000 homes were foreclosed on during the last 90 days. These homes now get added to the already staggering 9 month supply of homes available in the market. The new foreclosures will be added to an already over supplied inventory. Mortgage institutions eager to recoup some of their investment will be motivated to sell these homes at a discount to move them fast. This will put further downward pressure on already reduced market pricing.

Matthew Grahm of MortgageNewsDaily puts it all togather nicely in an article titled Current State of the Mortgage Industry I highly encourage you to read his post. He even includes a graph from Yale economist Robert Shiller which is an enlightening look at home values over time.

Getting back to my initial question, How will these economic factors effect the housing industry? I don’t see anything good in the short term. Increased housing supply being sold at a discount. A reduction in the qualified buyer/borrower pool. Interest rates that may not move the way the Fed wants them to because of supply and demand forces out of the Federal reserves control.(Underwriting guidelines) A weak or recessed economy. All add up to bad news for the housing industry.

What are your thoughts? Is there a silver lining that I have not yet seen?

The jobs report released this morning, as reported by CNBC.com, is causing jubilation on Wall Street. Traders are excited about the news which is twice what conventional wisdom expected. Markets around the world are reacting positively to the news. If everyone is so happy why does my headline say Ouch?

Yesterday the Fed poured 41 Billion into the markets to shore up liquidity. The fear was that the markets would run into the same liquidity crunch they faced in August 07. Today’s news should have been that the Fed had made the largest infusion of liquidity since September 19, 2001. That infusion was made to combat market fears right after the attacks of 9/11. Today’s job report is so strong that traders are now saying, “credit crunch, what credit crunch?”

The simple fact is that good economic news is bad for the housing market. Two days ago the Fed made a 25 basis point reduction, which was widely expected. Conventional wisdom is that the small reduction signals that the Fed is more afraid of inflation than it is of the economy moving into a recession. Today’s job numbers, which have blown away expectations, is so strong the fear of recession has become greatly reduced. The signal to the Fed is clear. No more rate cuts will be required at this time. This is very bad news for the housing industry. The housing industry, facing a glut in inventory, free falling prices and margins is in desperate need of lower interest rates. Don’t look for any help soon. Ouch!

The Federal Reserve board cut rates again today. The rate cut was a modest 25 basis points off the federal funds rate. “The Fed made the right decision” says NAHB President Brian Catalde in a National Association of Home Builders press release. He went on to say that this should be good new for new home builders. Not everyone was as optimistic as Mr Catalde. Businessweek’s Ben Silverman and David Bogoslaw saw more a lift for the stock market in the Fed’s decision. Bankrate.com sees the rate cut as more of a boom to the stock-market than to the sagging housing market. While they are not overly optimistic on the housing recovery, they do provide a nice graph on historical interest rates. InmanNews is interpreting the news as strong economic results are reducing pressure for further Fed cuts. According to Inman’s report the Fed feels this will further add downward pressure on the housing industry.

Our hearts and prayers go out to everyone effected by the massive fires in southern California.

I can’t help but wonder how this is going to effect the building industry. Will this be a boom to the industry, or just another nail in the coffin?

When Katrina hit New Orleans the home building industry was in the midst of the biggest boom in recent memory. The rebuilding efforts increased the demand for building materials and contractors. Increased demand lead to shorter supply with the consequences of higher prices. We were fortunate at the time because we were so busy no one noticed. Solution, raise prices, delay starts, problem solved.

Today we find ourselves in the midst of the largest market downturn in 20 years. How will the increased demand of supplies and labor impact us today? New Home prices are falling. Margins are almost non-existent. Builders are struggling to survive. Contractors have gone out of business. Can they absorb increases in hard cost of materials and labor?

On the surface it would appear that the answer would have to be no. But what if there is a silver lining to be found in the tragedy of the California wildfires? During the massive rebuilding effort of Katrina contractors flocked in from all over the country. Supplies also arrived in such large quantities it created shortages elsewhere. All of the goods and services required to rebuild the property destroyed in the California wildfires may be the saving grace for the new home building industry. It may keep some suppliers and contractors busy enough during this down turn to allow them to survive long enough for inventories to be reduced and the market to regain some form of equilibrium.

In nature fires are a way to cleanse the environment allowing for a renewal of growth. I for one hope this tragedy can clear some of the economic brush, providing new growth for our troubled industry.