Home Prices Fall For First Time in Decade

The National Association of Realtors announced Existing-Home Sales today. The data is consistent with our expectations of softening sales and prices and increased inventory:

• Total existing-home sales slipped 0.5 percent in August; This was 12.6% lower than August 2005;

• National median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000. . .

• The drop in prices is the first year-on-year decline since 1995, and is the second-largest decline in the 30-year history of the survey;

• Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale -- a 7.5-month supply at the current sales pace. This is the highest supply since April 1993;

• Sales have now declined for five months in a row and 9 of the past 12 months;

• Existing home sales weakness is similar to the New Home Sales report last week , which showed construction plunging by 6% in August; New Home Building activity has returned to leves seen in 2003.

As we noted last month, there are a variety of reasons Why Don't Big Housing Sales Drop Produce Big Price Drops. Suffice it to say, the data assmebly methods leave something to be desired.

I continue to be impressed with the disconnect between Housing and the Equity markets. Its pretty clear the bond markets get it, as have the commodity markets. Equity markets, on the other hand, are still contemplating some sort of a a soft landing / Goldilocks environment. Well, someone will be right and someone will be wrong . . .

The WSJ's Marketbeat noted a disconnect between "today's figures on sales of existing homes and other data from the National Association of Realtors":

"Richard Iley, senior U.S. economist at BNP Paribas, goes so far as to say today's figures are "suspiciously strong." He notes that the NAR's index of pending home sales is down 11% in 2006, while existing sales are down just 4%. The year-over-year rate of decline in existing-home sales is 12.5% through August, but the pending index, as of July, was down 16%. "Expect catch-up in the 'official' NAR resale numbers next month," Mr. Iley wrote.

The existing-home-sales report's headline number -- that sales had only fallen 0.5%, better than expected -- buoyed the stocks of homebuilders after it was released at 10 a.m. EDT. But those stocks fell sharply thereafter, as the underlying data still remain weak...

Mr. Iley also notes that the housing-price decline is likely to hurt consumer spending. Mortgage-equity withdrawals, which consumers have used in the past several years to finance spending, have declined. According to last week's Fed flow-of-funds data, mortgage-equity withdrawal sits at 1.5% of household disposable income, the lowest since the 2001 recession. Lower home prices won't help that, and prices could stay under pressure as more houses go unsold -- 7.5 months' worth of supply is on the market now, the most since April 1993. "As the rate of house-price inflation continues to fall and heads into negative territory, this wealth spigot is not only being turned off, but may move into reverse," he said."

Most astounding of all, the National Association of Realtors somehow spun the data as Bullish:

David Lereah, NAR’s chief economist, said home sales appear to be leveling out. “After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace,” he said. “It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build up in the inventory of homes on the market.”

Kevin Depew pointed out the absurdity of this:

"Just ask the chief economist for the realtors group: 'The price correction is a welcome development,' he said, because it stops the bleeding. 'Sales have hit bottom,' he said. 'Sellers are finally getting it.' "

Given that Realtors routinely describe tiny apartments as "cozy," and manage to use the phrase "Handyman Special" to describe houses which you and I would call "shit-holes," perhaps we shouldn't be all that shocked by any spin from the group's chief economist . . .

Comments

[Paul Meisel:]

The long resistance to price drops, while the number of homes for sale grows, is at least in part due to the speculative nature of some sellers. I am aware of many local sellers advertising their homes for "I'd like to get that" prices, with no real need to sell -- they would just like to take a large profit if they can get one. Many of these are second homes, or the first homes of retired "snow birds" that still keep dual residency.

The appearance of irrationality in the market is due at least in part to the differing circumstances of market participants.

2006 Sep 26 02:19 PM

[Mike Mosieur:]

This is a great site. I love the NAR comments. I am a Realtor and a Real Estate investor. I bought my first house at 19 and am now 55, so I've seen this "Bubble" stuff before. I am a certified member of the NAR, those lovable number benders. Google all the David Lereah sites popping up. It sucks to be him about now. You can bet the NAR is loosing dues paying members as we speak and my guess is as this whole train wreck of a real estate market plays out, The NAR will announce that Mr. Lereah is leaving to "seek other opportunities".

"Why Don't Big Housing Sales Drop Produce Big Price Drops" I believe was a question posed above. One answer is that when a house closes, it is considered "sold". However the price it closes at was determined 3 to 6 months previously when the contract was written. This would be on a previously owned home. Some sales of new construction don't close for a year. So the sale price, or the price at closing, in a declining market will lag the actual sale price of a similar home on the day of closing. We won't know Augusts real sales prices until possibly December.

Realtors do other things to bend the numbers like instead of reducing the price of a house, they pull the listing and relist it as a new listing for the reduced price. Susequently the data on time of listing and price reductions looks better than it actually is. Also, with new houses and now some previously owned houses the sellers are offering spiffs, like cars, vacations and cash back. The value of these items are not usually reflected in the sales price.

I make more money in a down market than a hot one. I only hope that the coming blood bath in the real estate market will not effect the overall economy to badly. There is a differance between cutting yourself shaving and hacking your arm off with a machette. Unfortunatly, I suspect the worst scenario. I have never seen it like this. All we can do is hope for the best.

As a parting shot, I believe that Alan Greenspan will go down in history as the most reviled person of the decade. His attempt to save us from the fallout from the dot com bubble by lowering the prime rate to 1% has had the unintended consequence of creating the out of control Frankenstein Monster the real estate market has become. I am afraid we ain't seen nothin' yet, including but not limited to an S&L type bank disaster. Lets hope for the best and make money on the great real estate deals that are definitly coming.

2006 Sep 26 06:02 PM