Pro Teck: Falling Supply to Create Spike in New Home Prices

The U.S. housing market ""has entered a sustainable period of improving conditions,"" ""Pro Teck Valuations"":http://www.proteckservices.com/ CEO Tom O'Grady says in the company's most recent Home Value Forecast.

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Pointing to ""very low mortgage rates, stable to rising home prices, declining unemployment, declining housing inventories and a strong rental market,"" O'Grady says housing is in a good position to continue growth. Those positive trends should lead to growth in the overall economy, he adds.

""As real estate has historically been one of the most important leading indicators of economic activity, this has positive implications for the economy,"" he says in the report. ""This is particularly true for the new home market. Even though new homes represent only a small percentage of the overall housing market, they have a disproportionate effect on the economy since data shows that on average, three new jobs are created for a year for every new home built.""

Each of the company's forecasts picks a housing trend and studies its influence on the market. This particular update shines a spotlight on months of remaining inventory (MRI) of new homes listed for sale and examines how that statistic affects median single family home price changes. The report also examines why there has been a divergence between new and existing home prices in the recent down-cycle.

According to recent data, the inventory of new homes for sale has fallen dramatically since 2008 to 4.5 months, closing in on its lowest level in 50 years.

""The primary reason for the low months of remaining inventory for new single family homes is the historically low number of new homes for sale,"" O'Grady writes. ""In recent years, new housing supply has been running at the lowest levels since the 1960's due to the slow down in new home construction, the size of homes being built, and the complicated process for selling/buying distressed properties.""

The drop in MRI is expected to be a blessing for new home prices, however. Data going back to 1972 shows an inverse correlation between changes in median price on new single [COLUMN_BREAK]

family homes and changes in MRI. In short, whenever MRI starts to drop, the median price starts to spike a year or two later.

With new housing supply at its lowest level in almost 50 years, MRI will continue its steady decline, leading to another likely pickup in prices.

Of course, the drop in new homes for sale brings its own problems. Recent drops in distressed sales indicate homebuyers are more interested in new homes--a market that isn't ready for a spike in demand.

""Many potential buyers of [distressed] homes become frustrated with the elongated acquisition times in the short sale and foreclosure sale markets and turn to the new home market, if possible, where they know they can transact a home at a well-define closing time and price,"" the report says. ""The problem is that the number of homes available in this channel is typically far below normal levels, which puts added pressure on what new inventory is for sale.""

Given that data, ""it should not be a surprise that nationwide, new home prices have held up much better than existing home prices.""

While new and existing home prices have tracked each other closely since the late 1960s, there has been a more noticeable gap between the two in recent years. The most recent monthly median new single family price of $256,900 is down less than 1 percent from its peak in 2006. Meanwhile, the nationwide median existing single family price of $183,900 is down 20 percent from its peak in the same year.

While the report acknowledges that median prices are being distorted by the geographical distribution of new sales, it asserts ""it is a fact that the new and existing home markets have performed quite differently in recent years due to the underlying supply-demand situations.""

Geographically speaking, Texas and Oklahoma were home to five of October's top 10 metros in terms of market conditions, confirming ""the strength of the real estate market in this part of the country,"" said Michael Sklarz, principal of Collateral Analytics and contributing author to the Home Value Forecast. Sklarz also noted that all of the top markets experienced significant declines in active listing counts over the past year, leading to smaller MRI and tighter markets.

The bottom-ranked metros were hurt most by ""local, not regional, economic issues,"" according to Sklarz. Those markets were more spread out across the country, ranging from Oregon (the Portland area) to South Carolina (Greenville and the Richmond County area). Many of those areas are plagued with high MRI--some in the double digits. However, the news for the bottom 10 wasn't all bad.

""We are seeing positive trends in the bottom ranked list--such as the declining number of days for sale on the market in some areas,"" Sklarz said.