The Housing Supply: Where Recovery Really Starts

Jerry Howard, chief executive of the National Association of Home Builders, told CNNMoney.com last week that overbuilding was a key reason for the current housing decline–and he’s not kidding.

At the end of October, there were 191,000 finished homes hanging out on the market, 14 percent more than last year, according to government data.

The number swells to 500,000 if you include new homes about to be built. That gives us a housing supply of more than eight months–and a declining home price.

As the housing supply grew, demand shrunk, and new home median price fell a record 13 percent in October.

And what about the plan announced two weeks ago to rescue Americans in mortgage trouble? It’s been touted for keeping a large crop of homes from being foreclosed upon and added to the housing inventory–but many say it won’t be enough to spur sales of homes that are already just sitting there.

"At best, [the plan] may stop some of the hemorrhaging of the housing market, but it doesn’t necessarily turn things around,” Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Mass. told Bloomberg. "The fundamental problem with housing is oversupply.”

Because of the excessive supply, CNNMoney.com reports that many of the big publicly traded builders–like Lennar, which announced at the end of last month it would sell 11,000 properties to Morgan Stanley for 40 percent of the value–have seen their homes’ value decline.

However, while Howard says price drops may continue, he doesn’t expect homes to sell for 50 or 60 percent of their asking price.

That’s good news for the industry. But how can we reduce the housing supply without slashing prices–which would further drag down already weak U.S. home values?

• Developers Can Lower Cost Without Lowering Price. According to Jon Boyd, president of the National Association of Exclusive Buyer Agents, developers want the recorded price of each home they sell to remain as high as they can get it because they have more just like it on the market to sell. They are, of course, thinking about the big picture–they have to.

CNNMoney.com suggests buyers can gain from that need by asking for money for closing costs and other home buying expenses like condo association fees and even mortgage payments.

The cost of buying a home will seem lower to them–but the home’s selling price won’t seem lower to the company that built it. Developers can structure deals to include those added-value extras, which might woo some of the hesitant buyers who are waiting for the big deals they think are coming in the months ahead.

Developers concerned about potentially outlandish requests, take note: If you’re trying to move inventory without cursing what’s left, make sure buyers know that Fannie Mae and Freddie Mac have set limits about how many incentives can be included in deals. Getting greedy can reduce the amount they can borrow–and ultimately, could block them from buying at all.

• Agents Can Work on Selling Pre-Existing Homes. It may take time for new home sales to pick up. But last week, the National Association of Realtors’ announced that its Pending Home Sale Index had risen slightly in October.

Could it be an overly optimistic take–or a sign that things may finally be turning around? NAR thinks so.

"Now that mortgage conditions have improved, some postponed activity should turn up in existing-home sales over the next couple of months, and I expect sales at fairly stable to slightly higher levels," NAR Chief Economist Lawrence Yun said.

Looking to capitalize on the new-home feel when selling existing homes? Add new siding or a deck to the outside of the house. The 2007 Remodeling Cost vs. Value Report, produced by Hanley Wood, LLC in cooperation with REALTOR Magazine, found exterior upgrades were the highest national percentage of costs recouped this year.

Whatever we do to reduce the housing supply, it’s important to remember not to get overexcited and overbuild when the market picks up again.

In the Netherlands, the Central Planning Bureau (CPB) has studied the prices of the Dutch housing supply for 35 years. Its findings are telling–there, a 10 percent home price increase in a year only increases new home building by 0.4 percent.

In the U.S., a 10 percent price jump causes new home construction to rise 40 percent–100 times more than in the Netherlands, according to Netherlands Info Services.

Just ask Karen Ward, chief UK economist at HSBC, who has studied housing.

‘In my research I didn’t find a genuine balance between supply and demand in the property market," Ward told the Observer "A lot of the demand has been speculative, driven by people expecting big capital gains on their properties. As people realize the rapid gains they were expecting aren’t going to materialize, a lot of that demand will drop off."

Sounds familiar. Let’s just hope that next time, we can control the supply of U.S.homes before it drops.