One of the reasons I have not come to the conclusion that we are done with falling home sales and prices is the massive build up in new and existing homes for sale. The most recent data shows inventory is continuing to rise.
Not only that, but the inventory build is occurring even as U.S. mortgage rates drop below year-ago levels.
Homes for Sale as a percentage of Total Housing Units:
The chart above, courtesy of Raymond James' Jeff Saut, shows the inventory build up is not only still ongoing, it's actually trending higher.
This chart makes clear why this cycle is potentially so much worse than the 1988-96 era, where prices were flat to negative for a decade.
Prices have slipped, but not nearly enough to eliminate the inventory. This has lead the usually cheerleading folks over at the N.A.R. to yet again lower their forecast for 2007 existing-home sales for the seventh-straight month. The real estate agent trade group is now predicting a drop of 8.6 percent in home sales versus last year. And, they expect new-home sales will fall a whopping 24% to 801,000 this year, and to 741,000 next year.
Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005.
Thus, Supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve.
There is a psychological component to all this: It very much reminds me of the investors who when having missed selling Amazon (NASDAQ:AMZN) at $400 and Yahoo (YHOO) at $200 and EMC (EMC) at $80 and Cisco (NASDAQ:CSCO) at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.
So they held onto stocks, hoping to sell again at higher prices, all the while prices fell.
One can imagine home sellers doing something similar. In their minds, their selling prices are "anchored" at the prices they imagined getting at the top.
Oh, and the NAR forecasts a price drop of "only" 1.7% this year. . .Sources:
Mortgage Problems to Dampen Home Sales in The Short Term
NAR September 11, 2007
Home Listings Show Modest August Rise
Total Rose 1.8% From Prior Month In 18 Metro Areas JAMES R. HAGERTY
WSJ, September 13, 2007; Page D3
U.S. mortgage rates drop below year-ago levels
Amy Hoak MarketWatch, 10:42 AM ET Sep 13, 2007 http://tinyurl.com/2y3lzh
Realtors lower existing-home sales forecast
September 12, 2007