As Home Sales Plunge, Some Say the Crisis Is Almost Over

Rebound coming any minute now... any second... Bueller?

New Home Sales Plunge to Lowest Level in 16 Years

• Sales of new homes plunged in March to the lowest level in 16 1/2 years as housing slumped further at the start of the spring sales season. The median price of a new home in March compared to a year ago fell by the largest amount in nearly four decades.
• The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.
• The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.
• The dismal news on new home sales followed earlier reports showing that sales of existing homes fell by 2 percent in March. Housing, which boomed for five years, has been in a prolonged slump for the past two years with sales and home prices falling at especially sharp rates in formerly boom areas of the country.
• For March, sales were down in all regions of the country, dropping the most in the Northeast, a decline of 19.4 percent. Sales fell by 12.9 percent in the Midwest, 12.5 percent in the Midwest and 4.6 percent in the South.

Remember everyone told us, just wait until the spring season! Housing will be back! Thats when the rebound begins (they were telling us this 6 months ago - notice how they don't come back to say - oops we were wrong - they just keep saying "wait 6 more months") Because as we all know, 5-6 year bubbles always get fixed in 12-14 months. Or so the pundits tell us. I am surprised the housing stocks are not up 50% on this news. I mean, this clearly signals the worst is behind us and it's all upside from here (right? Bueller?). Maybe the homebuilders need to start doing writeoffs to the tune of $10 Billion or so. That seems to get financial stocks to run up 20% on "not as bad as we expected and everything will be fine in 6 months".Again, the quicker home prices fall, the better it is for the economy - people don't realize that, but that's just the reality. The less, as a % of income, people need to spend to put a roof over their head, the more they can spend on luxuries... like say... rice. And the more we spend on luxuries like... wheat... the quicker we can get this consumption culture, that is 70% reliant on people spending more than they have... going again.On the dark side, while I believe we are now in the 3rd or 4th inning (not 9th inning like the talking heads keep telling you) of the correction - the more I see the total disregard for inflation by the powers that be (oh yes they will talk a good game next Wednesday just like they talked a good game about how they care about inflation while cutting rates 300 basis points the past 6 months) - the more I believe housing prices will fall farther than I first anticipated. [What Should Median House Prices Be Today?]

People are getting poorer in real terms. And fewer people will be able to come up with the money for down payments... the reality is wages have not kept up with inflation this entire decade.. and that was with inflation at far lower rates than we've seen the past 18 months. So more and more people are losing buying power at a faster rate. But keep the spin going ... let's talk about how inflation is nearly nonexistent and this is a short shallow slowdown that we will be out of "in 6 months".

Just stare at the chart on this link for 30 seconds every time your cortex tells you to believe the pundits and the "housing recovery is imminent" [Unintended Consequences of the Coming Socialization of the Housing Market]

** Note if you live in Texas, the Western Plains States, or in a farming community - ignore everything above - times are good! :

Short spin

Comments

[cranky old investor]

it's about affordability; it's about momentum; it's about breaking the link between housing and investing;
it will take a lot of time for the housing crisis to resolve itself. but it won't be fully resolved until reasonably safe mortgages can be made at levels that are actually affordable by buyers without artificial stimuli of "no credit check" and "no money down"

[richjoy]

Trader Mark -- My rant follows, but please understand that it is not only directed at yourself, as the average article writer/talking head seems to enjoy making the worst possible case with current housing statistics. Let me take home prices for example:

OK, home prices have fallen when compared to last year's prices...we get it! OTOH, you also stated (correctly) that home prices benefited from a 5-year boom. So, how about we expand our scary statistics to recognize that home prices rose to wild and speculative bubble levels over the last 5 years; let's compare last month's home prices to pre-bubble (2002?) prices, plus 2% or 2.5% annully for inflation...what does that say about last month's home prices?...wouldn't that be a more reasonable and fair comparison?

Oh, I get it...that wouldn't be as scary, thus not worthy of writing about. Who would pay attention?

[islandcreek]

You answered your own question in your last sentence. ** Note if you live in Texas, the Western Plains States, or in a farming community - ignore everything above - times are good! : Exactly! Of course there are parts of the country that will not recover for a long time. This is a VERY big country, and our economy (and the stock market) is showing its long term resilience by its response to the Fed's moves. I lived through the real estate downturn in 1979-1983, and the one in 1988-1992. It's NOT different this time. Have a little patience and faith in your fellow citizens.

[TraderMark]

Richjoy, thanks for your comment. Not trying to be demon of doom. But just a counteraction to all the "boom" talk on most media and TV.

As for your example - do you take into account real wages have been falling since 2000? For the bottom 80%? I'm not talking the top 1% or even 2-10 percentile.

When wages fall in real terms, that is very different from previous cycle... this is 8 years in a row, and as inflation ramps its only going to continue. In a vacuum home prices should fall, just alone, from real wages falling. But we are not in a vacuum - we are coming out of a bubble.

But again, as I noted and islandcreek mentioned - if you are in a farming community or a Plains state or energy related, its all a moot point - I expect housing to hold up very well. The problem now will be we are going to have a problem with our internal migration - about 1 in 7 people move every year. Quite a few of those are going to be hostages in their homes since they cannot sell them, and that is going to hurt the overall economy. I'm just sick of hearing about the imminent recovery - its been about a year now we've heard it.

[billddrummer]

It's still related to affordability of housing. Sales will keep falling until prices move low enough to permit middle-income Americans to afford to purchase homes with conventional mortgages.

Year over year comparisons will start looking better this spring because the big drop in sales volume occurred last year, when nontraditional mortgage products became unavailable. So don't be surprised if pundits start saying "the crisis is over, look, sales are only down 10% from last year." The reality is, we're looking at a fundamental change in the housing market. The only other question is whether a change in consumer behavior is in the offing as well.

["Magazine-Cover-Indicator" Indicator....]

If you live in Texas, expect house price declines this year.

[jimsep]

Right now its not the level of home sales that matter. It is the number of permits and starts that mean everything. They need to almost vanish for a while to get the backlog of unsold homes down or at least stop it from going up. But the homebuilders, including the public ones ,continue to build, defying all logic.

[RE.porter]

The affordability and credit availability issues have got YEARS to go as a slow "bleed." If I had a nickel for every call that "it's almost over," I'd be able to buy a million dollar condo. Well... 750k now!

[Matt Blackman]

Looking at the housing picture from 30,000 feet, it is important to remember that real estate cycles are long and average 18.5 years. We've had a good run as home (and asset) prices got a tremendous boost from the Fed with the lowest interest rates in 50 years. This combined with the babyboomer effect (78 million of then in the US right now) driving home prices higher in real demand and then through speculation caused the biggest, most wide-spread real estate bubble in history, not just in the US but world wide.

Now, depending on where in the world you live, that bubble has either broken or is in the process of breaking. Such events take years to resolve not a few months or a year or two.

This is not a "doom and gloom" scenario but a realistic cycle that has to play itself out. We will get rallies because prices in bear markets do not simply go down unceasingly. These sometimes powerful rallies are driven by the hopes that the bear is over. Just take a look at the Nikkei225 Index in Japan that has had at least 6 powerful bear market rallies, the latest of which rallied over 100% before rolling over again (see Figure 2 at tradesystemguru.com/co.../ )

[TraderMark]

jimsep, homebuilders continue to build because your Congressman continue to give them tax breaks

Then they put them in bills with cool names like "Foreclosure Prevention act!"

You would continue to build as well if market forces were pushed aside and you can keep offsetting tax losses with the silly tax payers money. People need to educate themselves about what is going on behind the scenes. The homebuilder lobby said they would stop putting money into political coffers early in 2008. Within 2 months they got this bill. Thats democracy.

Read the truth here

www.fundmymutualfund.c...

Cramerica. For the corporation. By the corporation.

[Pangaea]

Don't forget that the availability of financing (i.e., mortgages) is key in any housing market recovery - and as far as I can tell, this supply is still shrinking mightily, as providers continue to flee the market and jumbos remain a challenge... while the supply of actual properties on the market continues to grow. Not too many new buyers who can afford to pay cash.

Regarding the stock market, I remain agnostic - I continue to hear the pundits talking about a second half recovery, and I hope they're right, but I remember all-too-well the repeated calls for a "second half recovery" in 2000, then 2001, then 2002, then finally 2003...

[jackooo]

Housing will not go up until '09. Prices are still to high and credit is lacking. Foreclosures are owner driven because most are smart enough to dump their houses when they are worth $200,000 less than they paid for it. Would you pay finterest on a $200,000 non visible sum?
The fed can lower interest rates but the banks are not passing it on FULLY to customers so the market lags.

[WAKEUP]

"...the more I believe housing prices will fall farther than I first anticipated." I TOLD YOU SO. I said, months ago, in the SA forum, that house prices will fall 50%, from their bloated highs. Now I say prices will likely fall even more than 50%, before any "recovery" takes place. My job takes me inside business offices ranging in size from mom-and-pop operations to very large, multioffice companies. Almost every person I talk with who is trying to sell a house tells me they have not had any offers ANYWHERE NEAR what they expected to sell their house for. And there is the heart of this matter -- no house is worth one cent more than a QUALIFIED buyer is willing to pay for it. And WHY would the few qualified buyers meet the still-bloated asking price, when all they have to do, is WAIT. The buyers smell blood.

[Malkiel]

As one who bought a house and sold a condo recently, I'm struck by how much every detail matters to the little people who are expected to do the buying and selling, but how little detail seems to matter to the pundits who sit in the towers of gotham speculating on it all.

Take the recent move by the mortgage insurance cartel to cut condo's out of the loop by requiring 20% down payments in any "declining" market. Condo's are entry level housing in most markets, and substantial numbers are bought with 0%, 3%, and 5% down FHA or VA type loans. If the mortgage insurers follow through with their plans, the freezing out of first-time buyers could exacerbate all the bad news--further price drops, higher inventory, plummeting confidence, more foreclosures. This story didn't invade the consciousness of the mainstream media, but it's a small detail that looms big.

Another detail that matters is the order of magnitude problem for upside-down sellers; sellers don't have cash reserves to take more than a small loss, so they can't drop prices on their now-overpriced houses if there's no cash to settle up the old mortgage. When prices fall too fast you're left with a population of sellers who are locked into advertising their home for a noncompetitive price until they die or are foreclosed. The pundits heap ridicule on these sellers as though they had an attitude problem, but what they have is a financial problem worthy of analysis because it will affect the market going forward. They may be a wave of later foreclosures not revealed in ARMS loan data.

The devil is in the details, but the pundits who aren't in the real estate trenches are missing many of the details...

[Wildrose]

How far the housing market has to adjust can also be measured by the cost to rent residential housing. Right now in the areas of the country where housing prices went through the roof it's much cheaper to rent. Look at what happened to the rental market these past five years nationally. The CAP rate for investors fell to as low as 4% in some areas of the country. That CAP rate is rising but must rise some more as a measure of bringing a stabile balance between housing prices and housing rental prices. Once this is achieved more homes will be selling, which also mean the prices must drop further so that a 30 year mortgage with say 10% down becomes a competitive choice to renting.

In Southern Oregon we have an 11 month supply of homes to digest. From August 2007 until March of 2008 median housing prices have fallen from $273,000 to $220,000.

I note that option arm loans in our area comprise only 15% of the total loans written as compared to Santa Rosa, CA for instance where the number is over 37% of loans written. I only make that observation to attempt to permit a realistic comparison between our market and theirs for the readers interest.

However, there is one last critical issue that no one has discussed that I know of that is very important to how long the housing recession will last. That issue is Buyers. Where did all the additional Buyers come from to purchase all of the multitude of new houses being built across the nation these past few years? They came out of the ranks of "future" home buyers. By that I mean that under ordinary circumstances these future home buyers would not have naturally or normally evolved into todays market place. They were the buyers who would normally be stepping up to the plate to buy a home in the "next five year" period. This housing frenzy took them prematurely out of the chain and sold them houses. Now the "next five years" of home buyers has been exhausted. Who is in the pipeline? Nada in my opinion. Not only are these folks not in the pipeline they have ruined their credit and we won't see them again for ten to fifteen years as they are forced to rebuild their FICO scores to their former level.

[Kunst]

Unless you see a strong and sustained increase in incomes, it will be a LONG time before house prices come down enough and/or wages catch up enough to bring the market back into equilibrium.

I bought a house in 1994 for 20% below asking price. It had virtually zero appreciation, despite being in an excellent market and location, for the next 7 years. Then it nearly tripled through 2006. I assume it has lost 1/3 of its peak "value" although I wouldn't like to have to find out by trying to sell it.

Homeowners who bought or refinanced in the last few years have little, no, or negative equity. As long as they don't need to move, that can be OK. But over time, things happen -- death, divorce, relocation, job loss -- that can force them onto the market, where they become part of the problem.

There are only two "solutions" to this imbalance: time, or inflation that includes wages. Price inflation alone is not inflation, it's just getting poorer.