Overbuilding and the drop in volume.

Posted at 11:50 AM, Aug. 18, 2006

Factory orders for new homes have fallen.  CEO of Toll Brothers, a large buildier of new homes, attributes the decline in demand to oversupply and substantially reduced speculative buying.

Historically, builders overbuild during booms and create oversupply.  Speculative demand is gone due to higher interest rates on loans, especially loans used by speculative buyers. Loans used by speculative buyers usually adjust very quickly to changes in the short term feds funds rate.

How pervasive, in the aggregate, has overbuilding of new homes and condos been?  Nationally, there may have been quite of bit of overbuilding in some metro area, think Las Vegas.  In Southern CA the population continues to increase and the economy is continuing to grow.  The overbuilding here is not expected to be as great as it was during the late 80's boom.

Under these conditions it is highly unlikely that home prices will fall.  As long as people have jobs, home prices should be stable.  The appreciation seen over the last several years is long gone though. 

This does not bode well for many in the real estate business.  If buyers are not buying and homeowner's are under no pressure to sell then the volume of home sold should decline substantially.  Real estate brokerages make money on each transaction and their revenue will fall significantly as the number of homes sold decline even if home prices remain stable.

Thus, look for a shakeout in the RE brokerage biz if conditions stay like this.