Housing Market Meets The Proverbial Cliff

Well, the news on existing home sales is out and it’s about as bad as some of the more savvy prognosticators predicted. From the NAR:

Existing-home sales which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.

The national median existing-home price2 for all housing types was $182,600 in July, up 0.7 percent from a year ago. Distressed home sales are unchanged from June, accounting for 32 percent of transactions in July; they were 31 percent in July 2009.3

“Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses,” Yun said. “Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward.”

Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply4 at the current sales pace, up from an 8.9-month supply in June. Raw unsold inventory is still 12.9 percent below the record of 4.58 million in July 2008.

Am couple thoughts, and I’ll have more on housing, particularly Frannie a bit later.

First, these numbers are about 30% below the consensus predictions for July home sales. Clearly, the economics profession has little if any handle on housing industry dynamics. One is left wondering if they just pick a number out of the air or simply extrapolate from prior trends when offering their forecasts. What else don’t they know?

Second, Lawrence Yun’s remarks about housing prices having stabilized despite all of this takes the art of applying lipstick to pigs to a new level. Whether that’s a higher or lower level, I will leave up to you to decide.

With this much inventory and the obvious lack of demand, the shoe of falling prices will drop just as soon as the statistics catch up with reality. Median prices are being supported in his backward looking analysis by sales at the higher end even as the lower end craters. It’s a statistical anomaly that will reverse quite soon.

And finally, disabuse yourself of the notion that this is simply a reaction to the end of the homebuyer tax credit. Here’s a graph from from Daniel Indiviglio showing monthly annualized home sales on an seasonally adjusted basis:

NAR existing sales 2010-07 cht2.png

Note that this sad tale was being told back in May when sales started tailing off, even though the expiration of the credit was still sixty days away. Sure, the damned thing just accelerated sales that would have occurred anyway, but the weakness of this report coupled with the sales decline over the past few months demonstrates that we were just pulling forward pathetically weak demand.

Bottom line, despite practically free money the demand for homes has historically fallen off a cliff. With 10% unemployment, employed workers taking pay cuts via furloughs or scared to death for the security of their jobs and a federal government apparently without a clue as to its future economic policy, it’s small wonder that folks aren’t making the biggest financial decision of their lives. And, that friends, is the reason this isn’t going to turn around anytime soon.

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