Home Sales Fall to Record Lows, Prices to Follow

Existing home sales drop 27% in July and New home sales drop 12.4% as Economic Recovery slows.

HOT HIGHLIGHTS key points from the articles shown below:

• Existing home sales fell 27% in July, although actual numbers vary widely by region.
• New home sales fell 12.4% 
• New and existing home inventories now exceed 9 and 12 month supplies respectively. With so much excess inventory caused by overbuilding in the past, the last thing we need is artificial stimulus that encourages more building. See "Is the Housing Bounce a Stimulus Reaction or Sustainable Growth?" 
• Not reported is the shadow inventory of (1) foreclosed homes not yet listed for sale, (2) delinquent loans from banks who have not yet foreclosed, and (3) private sellers who want to sell but are avoiding the down market.
• This was a surprise to forecasters who extrapolate trends without considering market drivers and inhibitors.
• With prices and interest rates at record lows, it looks like a buyer's market, but without jobs demand is low.
• The biggest opportunity seems to be with well-funded investors who can buy with cash, as opposed to credit, and are stable enough to weather continued downturns as the market searches for a bottom.
• Prices will likely fall further by October and affect the S&P/Case-Shiller home-price index.
• Building contractors are understandably hurt by these economic conditions and want relief. Many will go under or be acquired, leading the industry to consolidate into a fewer number of larger builders with more political influence than ever.
• Builder lobbyists say "home construction drives jobs," but isn't that because they want more stimulus so they can sell more homes?
• HOT agrees with economists who say economic recovery and JOBS are key to a recovering housing market, not the other way around.
• Renting, as opposed to owning homes, gives unemployed workers flexibility to move where job opportunities are.

New home sales hit slowest pace on record

By Alan Zibel, AP, 8/24/2010
http://www.msnbc.msn.com/id/38847695/ns/business-real_estate/

High unemployment, slow job growth, and tight credit have kept people from buying homes. The housing industry got a temporary boost this spring when the government offered tax credits to homebuyers. But since the credits expired in April, the number of people looking to buy homes has dropped, even with bargain prices and the lowest mortgage rates in decades available.

According to the National Association of Home Builders, Weak home sales mean fewer jobs in the construction industry, which normally powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes.

Are Home Buyer Tax Credits a Mistake? 

By Nick Timiraos, Wall Street Journal, 8/25/2010
http://blogs.wsj.com/developments/2010/08/25/were-the-home-buyer-tax-credits-a-mistake/

EXCERPT: Clearly, temporary tax credits succeeded in getting buyers to change their behavior. But once the tax credits disappeared, so did the buyers. “Why would you have signed a contract in May and not in April when you could have gotten an $8,000 tax credit?” says John Burns, a housing consultant based in Irvine, Calif.

Some analysts say that even if the tax credit has simply shifted demand around, the tax credit did help to stabilize the market when the patient-the banking system, the economy, home-buyer psychology-was in the greatest need of help.

So how bad was the pay-back effect of the tax credit? A number of data points from the National Association of Realtors shows that-surprise!-markets where an $8,000 tax credit had the biggest bang for the buck were hit the hardest by the expiration.

The Housing Mirage: Homeowner subsidies have only delayed the day of reckoning. 

Wall Street Journal op-ed, 8/25/2010
http://online.wsj.com/article/SB10001424052748703447004575449751158395676.html?mod=rss_opinion_main

EXCERPT: Yesterday's news that sales of existing homes fell a record 27% in July did not trigger the end of civilization. Instead, while stocks generally declined on the news, shares of home building companies rallied on the chance that this market has finally found a bottom.

The trigger for yesterday's decline was the expiration of the $8,000 first-time home buyer tax credit, a political gimmick that altered the timing of some sales, provided a larger tax benefit to many people who were going to buy anyway, and did nothing to change the fundamental supply and demand for housing.

In helping to postpone an inevitable real estate reckoning, while temporarily creating a mirage of a recovering market, the tax credit followed in the distinguished footsteps of George W. Bush's Hope Now, Barney Frank's Hope for Homeowners, and Barack Obama's Home Affordable Modification Program (HAMP), among many other policy lowlights.

If a housing recovery is finally upon us, it will be no thanks to Washington's serial interventions, nor to the home builders who have cheered so vigorously for them. Together with the Realtors and mortgage bankers, the home builders form a lobbying army of the Potomac. The mission is to secure ever higher federal subsidies for housing. The strategy is to convince politicians of both parties that a robust economic recovery can only occur if residential real estate is booming again. This is false.

With the exception of temporary bubbles caused by reckless monetary policy, rising home prices are merely a symptom of a vibrant economy, not a cause. The true cause of economic growth and higher living standards is rising productivity, which occurs when societies wisely invest in many things, such as new technologies and new ways of doing business. Housing is just one of those things. Setting as a goal the maintenance of high levels of investment in housing has obvious political appeal, but it's junk economics for a nation that wants to innovate and grow.

Plunge in Home Sales Stokes Economy Fears 

By Sudeep Reddy and Nick Timiraos, Wall Street Journal, 8/25/2010
http://online.wsj.com/article/SB10001424052748703447004575449352676306326.html?mod=WSJ_hps_LEFTWhatsNews

 

[This long article has good charts and a video discussion of the latest housing data and what it means for the market, including home prices going forward.]

ARTICLE EXCERPT: ...Traditionally, the housing sector, along with purchases of durable goods such as furniture, would help pull the economy out of a recession as lower interest rates spurred higher demand. But this time, potential home buyers either don't have the jobs or savings to jump in or are wary of another decline in the market.

"Consumers and housing are in no position to lead us out," said Nigel Gault, chief U.S. economist at IHS Global Insight.

A sharp drop in mortgage rates in recent months appears to be doing little to stimulate demand. The average rate on a 30-year fixed-rate mortgage has fallen to less than 4.5%, reaching 50-year lows, but demand for new loans is weak. Many borrowers face challenges qualifying for loans because they have lost their jobs or aren't making as much money.

While tax credits to spur home sales helped stabilize housing markets across the country over much of the past year, the expiration of that stimulus in April has revealed lingering problems that have restrained housing.

Tuesday's housing report was "a wake-up call to anyone who's trying to understand why housing has not been recovering," said Ivy Zelman, president of housing-research firm Zelman & Associates. "The artificial boost from the tax credit masked the impediments."

Nearly one in four homeowners with a mortgage owes more than their home is worth, which means many are unlikely to sell unless their lender approves a short sale, in which the home sells for less than the amount owed.

One troubling sign for the market is that banks appear to be listing more homes for sale, just as demand has dropped. The number of bank-owned listings increased 12% in August from the previous month.

Price declines could lead to more delinquencies and foreclosures, and additional subsequent price drops. "You end up in a home-price-depreciation death spiral," said Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York. "It's not clear there's enough demand to handle this overhang without another round of price declines."

Housing's Witching Hour 

By Rolfe Winkler, Wall Street Journal, 8/25/2010
http://online.wsj.com/article/SB10001424052748703447004575449813824771410.html

SUMMARY: Housing prices may deliver a nasty trick this Halloween. That's when July's weak sales figure should really start showing through in the S&P/Case-Shiller home-price index.

July's bad home sales data shouldn't have been a surprize. When the government used tax credits to pay people to buy houses, it pulled forward demand. When those credits ended in June, demand disappeared, and July home sales hit their lowest level since the National Association of Realtors began reporting the data. The sales weakness and elevated housing inventory will hit prices soon.

Bad news on homes, goods adds to air of recession 

By Daniel Wagner, Associated Press, 8/25/2010
http://mo.statesman.com/news/nation/bad-news-on-homes-goods-adds-to-air-878293.html

EXCERPTS: It's starting to feel like another recession. Businesses are ordering fewer goods. Home sales are the slowest in decades. Jobs are scarce, and unemployment claims are rising. Perhaps most worrisome, manufacturing activity, which had been one of the economy's few bright spots, is faltering.

"The odds of a double-dip are rising and uncomfortably high," said Mark Zandi, chief economist at Moody's Analytics, referring to the possibility that the nation will tip back into recession. "Nothing else can go wrong. There is no cushion left."

Earlier this week came news that sales of previously occupied homes fell last month to the lowest level in 15 years. Unemployment remains near double digits because job growth in the private sector has slowed.

For the average household, whether the economy is growing slightly or not at all may not matter much. Two gauges that matter more are the unemployment rate, which is stuck at 9.5 percent, and home values, which are down about 30 percent from their 2006 peak.