It's the Inventory, Stupid!

To say that we're overbuilt in the Sunshine State would be an extreme understatement. With this, you could say that Palm Beach is the poster-child of the situation. From Linda Rawls at the Palm Beach Post.

'First, the good news from housing consultant MetroStudy:

• New-home starts in Palm Beach County hit a four-year low in the last three months of 2006. They dropped 62 percent just from the fourth quarter of 2005.

• Total inventory - including model homes, finished vacant homes and homes under construction - fell to a four-year low in the last three months of 2006.

• Housing supply declined 4 percent in the fourth quarter of 2006 compared with the same period in 2005.

Decline, decline, decline, decline. This is the good news?'

Hey, it beats the alternative. Though a 4% decline from record levels is not likely to cause a sea change in the housing market.

'Yes, in these topsy-turvy times - when it's quite possible to be "upside down" on your house (to owe more than it's worth) or to lower your asking price by $1 million and still not get an offer - declining housing starts, construction and inventory are all good news; signs that the distressed new-home markets in Palm Beach County and the Treasure Coast are trying to recover.

Any recovery, however, could well be postponed into the second half of the year. Most analysts don't even agree on whether the market has hit bottom.'

I don't know exactly why, but it appears the builders are much more bearish on the market than the realtors. Granted, the realtors aren't required to tell the truth because the NAR (National Ass. of Realtors) isn't a publically traded company. If it was, a few things known as the SEC and Sarb-Ox would cause the NAR to provide forecasts more closely aligned with that of the builders (i.e.; truthful).

'Just last Thursday, luxury-home builder Toll Brothers Inc. said its first-quarter profit dropped 67 percent due to hefty write-downs and other costs, and Chief Executive Robert Toll said "there are (still) too many soft markets."

The inventory of existing homes, which was up 71 percent Palm Beach County alone in December, may grow as "re-listers" - people who couldn't sell in 2006 - are likely to try again in the spring. And analysts expect a further uptick in the region's new-foreclosure filings as high-risk borrowers continue to default on loans and lenders tighten credit standards.'

More foreclosures = More distressed inventory

Ergo,

More distressed inventory = Lower Prices

And to continue our boolean logical progression,

Lower Prices = More Sales

And finally,

More Sales = Lower Inventory

But we're still at the very beginning of this clearance process. The article continues with a description as to how this situation was created.

'Many of those borrowers were investors who artificially pumped up demand - and prices.

"Builders ramped up production to meet surging demand during the housing boom," said Michael Larson, a real estate analyst with Weiss Research in Jupiter. "But it turns out a big chunk of that demand surge wasn't 'real' demand.

"It was investor demand - people buying up one, two, three or more homes at a time to flip, rather than people just looking for a place to live."

That artificial demand is gone now, Larson and others say. Investors have pulled out of the market, causing new-home sales to plummet.

In Palm Beach County, new-home sales dropped 36 percent in just one year - comparing the fourth quarter of 2006 to the same period in 2005 - according to MetroStudy in West Palm Beach.

Further proof the local housing boom has gone bust: Palm Beach County buyers closed on only 976 new homes in the fourth quarter of 2006 - down drastically from its boom-time peak of 3,123 closings in the third quarter of 2003, MetroStudy said.'

The situation is not pretty, and much more bad medicine is in store.

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