The bad news for the housing market continues to mount (see here, here and here). The dreaded payback effect from the homebuyer tax credit is causing sales to look particularly weak right now. However, the excess supply situation, which has been a big issue for several years already, will continue to hinder the market’s recovery as foreclosures pile up and shadow inventory begins to emerge. With that said, what are some factors that will bring the housing market back into balance? The first is a dearth of new construction activity. Weak residential construction activity is bad news for the economic recovery in the short-term, but fewer new homes will keep the inventory glut under control until foreclosures abate and the rate of new household formations—the second factor—begins to pick up. Weak job growth has caused new household formations to decline to very low levels, particularly when compared to the growth in U.S. population. Assuming job creation improves as expected over the course of 2010 and 2011, the number of new households formed should increase significantly when paired-up renters and re-nested children move out on their own.

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