The sub-prime mortgage crisis and the credit crunch that has followed in its aftermath are taking their toll on the housing market. On August 28, the S&P Case-Shiller U.S. National Home Price Index showed that home prices fell 3.2% in the second quarter. According to the National Association of Realtors, the inventory of unsold homes is at a record high. As sales have fallen, many home builders have seen their stock prices drop by more than 60% during the past year. How serious is this situation? Is there light at the end of the tunnel? Joseph Gyourko, director of Wharton's Samuel Zell and Robert Lurie Real Estate Center, and Todd Sinai, a professor of real estate, spoke to Knowledge@Wharton about these questions and more.
Transcript:
Knowledge@Wharton: The S&P/Case-Shiller Home Price Index, whose latest figures were announced on August 28, indicated that U.S. home prices fell 3.2% in the second quarter. What impact have these slowing sales had on home builders?
Sinai: The slowing sales are really a reflection of the slowing of the housing market, which is a sign that the home builders really don't have a lot of demand to build into. You can see that in their share prices; you can see that, during the boom, these companies were doing very well -- and that when we have a slump, it dries up.
During the boom, you need a lot of construction. People were moving into new households, or so people believed, and the construction increased in order to meet that supposed demand. And, when that demand dries up, for whatever reason -- and at this point it seems to be drying up for credit companies -- then there is no one to build for.
These are companies that have two sources of value: One is the flow of new construction delivering housing to the market, and the other is speculating on land in the future.
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