Economy Update: No Housing Bubble
It looks like the much-hyped "real estate bubble" isn't a problem after all. USA Today:

Gluts of unsold new homes have been earmarks of every big real estate bust in the last quarter century. But tighter inventory control by builders and the people who finance them, coupled with high demand, has squeezed the availability of finished homes just about everywhere. It's not a guarantee against disastrous overbuilding in the future. But housing economists say for now the lean inventory is a strong prop for high home values. "It's an unequivocally good thing," says Amy Crews Cutts, economist at mortgage investor Freddie Mac.

Sky-high demand may be enough to knock down the number of available new houses. But, says Carl Reichardt, industry analyst at Wachovia Securities in San Francisco, the hot market is masking a fundamental change that will linger long after things cool: less speculative construction. "Finishing a new house before it's sold is in decline," says Reichardt.

The most recent Census Bureau numbers show one key measure of new homes available for sale as low as it's been at any time in the last 40 years — a 3½-month supply at the current sales rate.

Homeowners can take some comfort from that. The biggest regional housing busts of the last 25 years — Texas in the 1980s and Southern California and the Northeast in the early 1990s — shared a common characteristic: a huge number of unsold new homes that depressed home values for everyone. As the Texas real estate market was about to tank, for example, the supply of unsold new homes nationally stood at a record high — nearly 12 months' worth.

Today's ultralean supply "ought to mean more stability in current home prices, and it ought to cushion price declines in the future," Reichardt says.

Home builders don't typically make public the number of homes they sell before construction. But Reichardt estimates that eight publicly traded national companies will presell 45% of their output this year, vs. 26% in 1994.

For home builders who have managed to eliminate or reduce speculative building, the payoff can be considerable. Preselling leaves open the possibility of enticing the customer with profit-increasing upgrades. By closing the sale the moment construction is complete, interest charges on the money borrowed to build don't cut into profit.

I first mentioned this economic trend here on August 27th.