A Prick in the Bubble

From CNN

"Home builders are growing concerned about an increasing number of cancelled new home orders, which experts say could be a sign of an underlying weakness in the recent run in home prices."

"Specifically, the cancelled orders could be the latest warning sign that buyers who were turning to real estate as an investment, rather than for their own housing needs, are shifting out of real estate. And that could mean that in many hot markets, the air is about to come out of over-inflated real home prices overall."

"A survey recently conducted by the National Association of Home Builders of its members found one in 5 reporting more cancellations than six months ago."

"Toll Brothers warned that it is seeing investors bail on some markets, and supply now greatly exceeding demand in some cases. Besides the increased cancellations, new signed contracts fell 21 percent compared to a year earlier."

"When you start to see cancellations, you really get worried," said David Seiders, chief economist for the trade group.

"Typically, a downturn in a local economy -- particularly its job market -- can cause a drop in real estate prices and an increase in home order cancellations. But the trade group's survey found only 15 percent citing job losses by buyers as a cause for the cancellations."

The survey, which allowed the builders to cite more than one cause for cancellations, found:

• 45 percent saying it was due to a buyer's inability to sell their existing home
• 1/3rd citing the buyers not being able to qualify for financing
• 15% due to job loss

"Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market."

"Experts believe that the home buyer intending to live in a home is reluctant to cancel an order, even if the market seems to have softened. But an investor-buyer who more closely follows the local real estate market is more likely to cancel an order, even if they lose some deposit money, if they believe that the local market prices have fallen enough that walking away is more cost effective than buying and selling the home."

"The flight of investor-buyers from the housing market and the increased cancellations could therefore push real estate prices lower in different markets."

"Toll Brothers Chairman and CEO Robert Toll said the company's cancellation rate came to 8.8 percent of orders in the most recent quarter, up from a historic level of only 5 to 6 percent."

"At 8.8 percent we hope it's plateaued now," he said in response to a question during the company's analyst call."

"Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions," said the company's earnings statement. "Markets such which are sound economically and showing healthy job growth, will need to work through their excess supply before the imbalance once again tips in our favor."

I have a few questions... if there simply is not enough housing supply to meet the demand as we keep hearing from people in and associated with the Real Estate and building industry... then how could there be "excess supply"?

Next, we also hear "they aren't making more land" & "they can't build enough houses to meet the demand for the population"

...again, if these things are truly factors in why housing prices have ballooned... well, why are there so many listings for sale? Why are they staying on the market longer? If we can't build enough houses to meet the demand, why cancel any house orders?

If what we keep hearing is true, then there should be no increase in house for sale inventory.

There should be no increase in the time it takes for a property to sell.

There should be no cancellations of new house orders because according to the Real Estate & Building experts enough houses can't be built to meet demand.

How's that denial working for you?