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Why Reduced Home Construction is Good for Real Estate

Home construction is at a 50 year low with both permits and starts plunging to levels not seen since 1959. The recent drop off in permits suggests that further declines are ahead. Meanwhile, home-builder confidence is at a record low. How can this be good for real estate?

The market is telling all the home-builders that we have too much inventory. There is a massive over-hang of unsold homes including new homes and foreclosure homes that were built in the past five years when construction was at record highs. The market doesn’t need any more new homes to be built when there are so many recently completed new homes still waiting for a buyer.

The reason real estate prices have been dropping for the past few years is supply and demand. We have an excessive supply of homes and a reduced demand. The dramatic price drops that have occurred (some as great as 50% from 2005 highs) are creating a nice demand for the again affordable homes here in Las Vegas. With one more wave of foreclosures expected to hit the market in 2009 we still have plenty of supply in our pipeline. No further inventory is needed. The marketplace is telling this to builders loud and clear by the price of these foreclosed homes becoming less than a builder can build for. If no new homes were built for the next year or so our supply imbalance would disappear and we would begin to see appreciation again. Then building could begin again. This “reset” process is painful. Builders have a job to do and many don’t want to simply go out of business. However, seeing permit and construction activity at all-time lows is good for the long-term recovery of housing.