More Proof the Party’s Over In the Housing Market

While even the most pessimistic housing analysts had expected the best January weather in the United States in over 100 years to bring new-home buyers out “from the cold,” it certainly didn’t happen this January.

According to the U.S. Commerce Department:

— Sales of new U.S. homes fell a greater than expected 5% in January to the lowest level in 12 months.

— The inventory of new U.S. homes unsold in the U.S. is now sitting at a new record. As of January 31, 2006, U.S. new-home builders had an inventory of 528,000 built, but unsold new homes.

I continue to believe the biggest problems for the housing industry lie ahead. Some economists, including yours truly, are expecting the bellwether U.S. 30-year mortgage rate to hit between 6.5% and 7% by this summer, up from 5.71% in January of 2005. And, with as many as 50% of all new mortgages being variable interest rate loans, the Fed’s expected 15th consecutive rate hike (scheduled for this March) will only make matters worse for over-extended home owners.

There’s no doubt new-home builders are now throwing in all kinds of incentives (fancy TVs, free upgrades, better appliances, and more) in an effort to bring buyers in without lowering home prices. But, with an unprecedented inventory of over one-and-a- half-million new, unsold homes, sooner or later prices will have to fall to attract buyers. It’s economics 10–you can’t get rid of an oversupply of an item unless you lower prices.

The proof the party is over in the U.S. housing market could not be clearer. And, the action of the new-home builder stocks is telling the real story—these stocks are falling in price daily. Those that will be hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.