Inventory Reduction

By Fester

The first monthly report from the spring home selling season is out and it is ugly. Sales are slipping, prices are slipping and inventory is accumulating.  I find it hard to look at the current environment and be optimistic for housing as the fundamental still suck.  Barry Ritholtz at the Big Picture is looking at the guts of the home sales report and has a few bullet points I want to steal:

• Sales were down 18% from April 2007



• Inventory of existing homes jumped to 4.55 million, up from 4.12 million in March.



• Months supply for single family homes rose to 10.7 from 9.6, the highest since July 1985



• 11.2 months' supply at current sales pace, up 10% from 10 months at the end of March (25 yr avg is 6.9 months)



• Months supply in condos/co-ops rose to 14.2 months from 12.8.

This is ugly and will continue to worsen as long as builders are convinced that their best option is to keep on building as they have access to non-fungible funds in the form of time restricted non-recourse loans.  They are losing money on every home unsold but they'll make it up on the volume.  Thankfully some financiers and project developpers are realizing that there is a glut on the market and adding several hundred more units to a saturated market may not be a good idea.  The Pittsburgh Post-Gazette is reporting that a ten year plan to build 700 new residential units in Downtown Pittsburgh is on hold:

Blaming the nation's credit and mortgage crisis, the Pittsburgh Cultural Trust is suspending its nearly half-billion-dollar housing plan, which was supposed to be the biggest in Downtown history.

The lead developer on the $460 million, 700-unit RiverParc project, Concord Eastridge of Phoenix and Washington, D.C., questioned the trust's move....

Cultural Trust CEO Kevin McMahon said....

"We still clearly believe in this project. It's a fantastic location. When the credit markets rebound, that will allow us to move forward again. But we have to re-evaluate," he said last night....

Initially, plans were to begin construction on the first phase of 200 housing units in 2007. As the credit and housing finance crisis gathered steam this January, Mr. McMahon said the trust was still moving forward with the project but construction would start in 2009.

This week, with the housing and credit markets still poor, trust leaders decided they could no longer go on with the original plans.

"In effect we never had the final economically feasible plan and the credit markets collapse only corroborated that," he said. "This is certainly not unique to Pittsburgh. You can't open up The New York Times or The Wall Street Journal without seeing this happening to another mega-project around the country. New York, Chicago, Atlanta, Seattle ... They're all having these kind of delays."

If the housing market is to turn around, many more developpers and financiers of developpers will have to look at their pipeline and squeeze it tight to stop the excess flow of new supply from depressing already battered markets.  The Pittsburgh Cultural Trust may or may not have been able to finangle financing but it would have placed its organizational existance into the hands of best case projections, wild guesses and against a secular downward trend.  This was a good decision, and more decisions like this one will have to be made to contain the massive housing inventory glut.