Friday, August 22, 2008

What were homebuilders thinking?

The housing market debacle started with the collapse of the sub-prime mortgage market in August 2007. Thankfully, the Fed and Congress rallied, putting expansionary policy in place. The 3.25% reduction in short-term interest rates and $100 billion in tax rebate checks helped to keep the economy afloat as the housing market sank quicker than the Titanic.

However, in retrospect, it is easy to see that it was a mix of problems, including irrational building projects. The chart below shows the 3-month average annual change of existing home sales spanning the years 2004 to 2008 across the four US census regions.

By December 2005, existing home sales in the Northeast, Midwest, and South marked 0% or negative growth. The South plummeted one year later.

By the beginning of 2006, sales were already declining.

But homebuilders were still building. The table below lists the 10 states with the highest growth in housing units, measured by the Census, for the years 2006 and 2007.

As existing home sales were turning negative for the West and Midwest, this area was a continued target of for strong growth in housing inventory. Nevada homebuilding was hot, 4.5% 2005-2006 and 3.5% 2006-2007, and well above the national average, 1.4% 2005-2006 and 1.3% 2006-2007. In fact, except for Delaware and Louisiana, the same states saw the strongest housing unit growth in both 2006 and 2007. No wonder the housing markets in Nevada, Arizona, and Florida have been hit so hard.

The irrational homebuilders were caught with their pants down. It doesn’t make sense to start new projects when you can’t get rid of the ones you already finished.

Please leave comments. Best, Nontruths


  1. Wasn't a lot of the building done on spec? Also, the owners of land the buildiers were buying from are going into bankrupcy. It seems many people got into the home building business because they could make a quick buck, just like a lot of new banks who wanted to cash in on the subprime mortgages. Interesting statistic: 19.7% of the subprime mortgages are in foreclosure. That means 80% are not.

  2. Rebecca

    Just thought I would drop by and say hi.

    I have put a link to your site on my site.



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