Every time a report regarding the economy flashes across the news or crackles on the radio, the state of the housing market stands a good chance of playing a role. Home sales, new home sales, permits for new home building, all are venerated as reflecting the state of the economy as a whole. This may be true in the moment, but as a long term buoy for the economy, carefully counting housing sales will not last.
Housing has an undeniable effect on the market: construction and realtor jobs, forcing banks to continue to lend money, and the like. The money and time which is put into the movement of houses through the economy is the true value of homeownership as an economic force. Previously owned homes will always have this effect as they are current stock; the effect of new houses is only temporary, and will ultimately dilute the market as a whole. Whatever you think about a completely laissez-faire market, supply and demand will always rule a capitalist economy. If prices are to remain constant or even increase, the supply and the demand must remain relatively constant. If supply rises and demand remains stagnant, the developer and builder will soon find themselves upside-down in their investment, just as so many homeowners did in the middle of the last decade. That, the lesson has been, is not a good thing.
The less profitable any business is, the fewer employees it will have the funds to employ, meaning jobs will become scarcer. So if more of the population chooses to rent, move to an area where owning a home is impractical or impossible—think Manhattan—or simply decide to purchase an existing home, that “new housing start” indicator suddenly seems a little outdated.
If families starting out in life really consider their purchases, an existing home suddenly makes more sense. Choosing a house in a safe but not necessarily fashionable area, one that might require a bit of elbow grease, or even one that was foreclosed upon can be a better choice financially than one just built in a pretty neighborhood that is essentially perfect. Think of it as a clearance rack, in some respects: small imperfections can mean more money remaining in the bank. Some of the best deals on new homes—such as purchasing one from a builder in financial distress—are temporary solutions, as the builder has saturated the market with those new homes. It may solve a crisis for that developer, but the systemic trouble remains.
Homeownership is a laudable goal, but it is not one that will forever drive the economy. Housing is quite similar to currency. The more money forced into the economy, the less each dollar is worth; as newer homes flood a community when the population is stagnant, each home will command less money. All that can add up to another downturn like the one we are currently enduring, or even a double-dip recession. So to keep an eye on the economy, keep an eye on housing, but not just on new building. Absent ridiculous investors, a stable supply means a relatively stable price, and the stable economy all of America craves at the moment.