News Flash

August 25, 2010

Housing Market Begins to Fade Again

First came the bad news that existing home sales fell sharply in July, following expiration of the home buyer tax credit. The stock market acted as though this were a surprise, but it should have been no shock. The housing market is plagued right now by the continuation of a sick job market, stagnant incomes, and a national psychology in which most Americans are not convinced that home prices have yet bottomed.

The National Association of Realtors reported this week that closed transactions dropped 27.2 percent to a seasonally adjusted annual rate of less than 4 million units, the lowest level of any month during this current recession. What puzzles most analysts is why record low mortgage interest rates have not helped prop the home market up. Part of it is due to the precarious financial position households currently find themselves in. Part is associated with growing pessimism regarding the future of home prices. Part is associated with the more rigorous standards being imposed for mortgage qualification. While some see a glimmer of hope in future numbers, the bottom line is that this market will remain under pressure as long as there is more than 12 months inventory of homes for sale.

The next piece of bad news was the report that sales of new homes fell 12.4 percent in July to an incredibly low seasonally adjusted annual pace of 276,000. That's less than half the normal rate and the lowest in almost 50 years. Even more interesting is the fact that the collapse in new home sales is no longer restricted to the lower end market, which was plagued the most with upside-down subprime mortgages. There were fewer than 500 new single homes nationwide in July that sold for more than $750,000 and only 1,000 that sold in the $500,000 to $750,000 range. Clearly, all portions of housing market are now caught in the housing market recession, something that is not likely to end soon.

This weakness in home sales and building activity feeds upon itself. Fewer home sales mean fewer jobs in the construction industry, further exacerbating the problems of today's struggling recovery. This, in turn, will lead to even fewer new home sales. However, the sharp contraction in construction is actually good news in one sense because it is helping to keep new home inventories down. It is estimated that there are only about 200,000 new homes currently up for sale, which is also a contemporary record low. That should at least take some of the downward pressure off of new home prices.