Market Memo

The latest report from Harvard University’s Joint Center for Housing Studies was recently released and the highlight for those who track the residential construction industry is their assertion that despite high prices for housing, the conditions are not right for a bursting bubble.

The report tracked historical data about the economic conditions during the times when there have been major home-price reductions over the past 30 years. Importantly, those times have been characterized by overbuilding of new homes along with job losses. The report states that although there is evidence of overbuilding in many parts of the country, the employment picture is bright, with the economy adding enough jobs to pick up the slack.

“As long as the economy continues to create jobs and builders trim production to match slowing demand, house prices will keep climbing and the housing sector will achieve a soft landing,” says Nicolas P. Retsinas, director of the Joint Center.

The drivers of the remodeling market, however, are quite distinct from new construction, although there is a correlative affect regarding home prices. As housing prices have risen generally, many homeowners have seen dramatic increases in their home equity. Many have taken cash out through the re-finance process. And studies show that on average about 35 percent of that cash is rolled back into home improvements and repairs. In 2005, homeowners cashed out $450 billion in home equity… a record. So when we talk about the prospect of house price declines, we also talk about the a reduction in home equity and ultimately a lower level of remodeling activity attributable to cash-outs.

You can view the full report here: http://www.jchs.harvard.edu/publications/markets/son2006/index.htm.