Home Prices Drop; 1st time in a 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 . . .
>
UPDATE 2 September 25, 2006, 8:08pm
Via Mike from interest rate round up, these 2 charts show the price drop and inventory rise:
Year Over Year Price Drop:
Existing Home Inventory:
>
UPDATE September 25, 2006, 1:45pm
The Canadian Globe and Mail points out that U.S. house prices could drop another 10%:
Stéfane Marion, an economist at National Bank, disagrees with the NAR's statement that the faltering U.S. housing market has hit a trough and prices will start climbing again. "In our opinion, this forecast is way too optimistic."
The inventory of unsold U.S. homes climbed 1.5 per cent in August to its highest level since April, 1993. That surge, Mr. Marion said, has changed the dynamic of the housing market, but houses are still too expensive for many people . . . Even at the current reduced price of around $225,000, it is important to keep in mind that the median single family home is still selling at 3.7 times median-family income."
>
Sources:
Existing-Home Sales Down With Softening Prices
Walter Molony
National Association of Realtors, August 23, 2006
http://tinyurl.com/kxrfp
MarketBeat: House of Pain
Housing Prices On the Decline
David A. Gaffen
WSJ, September 25, 2006 12:00 p.m.
http://online.wsj.com/article/SB115918630195573000.html
Existing Home Sales Bullish!
Kevin Depew
Minyanville, Sep 25, 2006 10:11 am
http://www.minyanville.com/articles/index.php?a=11274
Why Don't Big Housing Sales Drop Produce Big Price Drops?
The Big Picture, Friday, August 25, 2006 http://bigpicture.typepad.com/comments/2006/08/why_dont_big_ho.html
U.S. house prices could drop another 10%
ROMA LUCIW
Globe and Mail (Canada), September 25, 2006 12:00 p.m
http://tinyurl.com/gy6vy
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Comments
To use realtor parlance, the housing market will be a "handyman's special" for the next year or two.
Posted by: angryinch | Sep 25, 2006 12:58:42 PM
What news did I miss for the 60pt moonshot at 12:15pm?
Posted by: Mark | Sep 25, 2006 1:08:55 PM
>>>Its pretty clear the bond markets get it, as have the commodity markets. <<<
But the bond market itself affects the housing market.
The lower rates go, the more a floor will be put into the housing prices. And at some point, low rates may even serve to restimulate the housing market.
Or is this all a house of cards where everything will eventually give?
Posted by: Michael C. | Sep 25, 2006 1:11:29 PM
The 'pause' and of thr rate hikes are the only thing that has keep inventories from really accelerating higher...even more so than now. But prices are still too high, in aggregate, fixed rate mortgages at these still high prices are still to expensive for many buyers. The downward price cascade still looms.
Posted by: KP | Sep 25, 2006 1:20:30 PM
Interesting...here they're not dropping prices, they're just giving away a free car w/ every home.
Sure it's only a Chevy Aveo, but we're only talking about $100-$150k houses here. (Deep South Texas)
What problem?
Posted by: Minmex | Sep 25, 2006 1:21:13 PM
I have seen the NAR chief economist on the various business channels for a long time and he really shouldnt be called an economist. He is really a marketing representative for the NAR. It is amazing the spin he can put on the numbers.
Maybe i am too suspicious but I wonder about the accuracy of the numbers coming from the NAR. Can we really trust them?
Posted by: GerryL | Sep 25, 2006 1:21:33 PM
Condos in the west appear to be leading the decline.
http://www.realtor.org/Research.nsf/files/condoreport.pdf/$FILE/condoreport.pdf
Sales volume down 24.8% year over year (seasonally adjusted)
Sales price down 6.5% year over year (seasonally adjusted)
Posted by: James Bednar | Sep 25, 2006 1:28:18 PM
From the New York Times article:
David Lereah, chief economist of the association, said he expects prices to continue to fall. “We do expect an adjustment in home prices to last several months, as we work through a buildup in the inventory of homes on the market,” he said in a written statement. “This is the price correction we’ve been expecting — with sales stabilizing, we should go back to positive price growth early next year.”
"We should go back to postitive price growth early next year"????!!! There is ZERO realistic support for this assertion.
Posted by: Sherman McCoy | Sep 25, 2006 1:41:54 PM
So this post, like many of the preceding, speak of the impending drop in housing prices. Barry, could we ahve one psot on what to do about it? I looked into the RE Index futures options the CME now has. There is no liquidity, so it looks like they are currently not a good option to hedge this. Is anyone using other instruments or tools to hedge this market, as long as we know it is coming down?
Posted by: UST | Sep 25, 2006 1:56:51 PM
I know the housing bubble is just so much fun to talk about but think about this: In the Bay Area, where house prices are the highest, over the last twenty years a home mortgage (30 yr, 20% down) payment has grown at slightly LESS than nominal GDP. This isn't bubble data. Sorry guys to prick your bubble.
Posted by: Norman | Sep 25, 2006 2:02:11 PM
"Is anyone using other instruments or tools to hedge this market, as long as we know it is coming down? "
How about relax, sit back and let a little time pass? And, please don't forget to breathe
Posted by: Larry Nusbaum | Sep 25, 2006 2:02:59 PM
http://bigpicture.typepad.com/comments/2005/12/howz_real_estat.html
Posted by: Larry Nusbaum | Sep 25, 2006 2:05:46 PM
From RogerH at the HousingBubbleBlog...
“‘We’ve been anticipating a price correction and now it’s here,’ Lereah said.”What about that book you wrote David? What was it called again - oh yea “Why the Real Estate Bubble Will Not Bust”
When was is published again? - oh yea Feb 2006.
Posted by: KirkH | Sep 25, 2006 2:10:38 PM
Larry-
You forgot to post the link to your real estate blog and your book.
Posted by: Mark | Sep 25, 2006 2:16:58 PM
http://money.cnn.com/magazines/moneymag/bplive/2006/snapshots/PL0667000.html
Median family income: $70,772
Median home price $755,000
Your Monthly Payment for 30 Years
for an Interest Rate of 6.500 %
on a Loan Amount of $ 755,000.00: $ 4,772.11
That's like 80% of the monthly pre-tax income. I don't know how San Franciscan's do it.
Posted by: KP | Sep 25, 2006 2:24:32 PM
I put up a couple charts on my blog illustrating just how big of a change we've seen in terms of inventory ... and how rapidly we've gone from double-digit price gains to the second-largest price drop in NAR history. It's pretty scary to look at in graphical format.
All of that said, the housing and mortgage stocks are rising (again) on what I can only interpret as hope that the Fed will come in and save the day with rate cuts given the dismal data. And of course, fixed rates are falling along with the bond market rally, something that all else being equal would re-invigorate the housing market.
In my opinion, the next few weeks of Mortgage Bankers Association data are absolutely critical. Do home purchase applications increase in response to the decline in rates? Or do they continue to stink because A) people are reading about falling prices and don't want to buy depreciating assets B) the only reason rates are falling is that the economy is heading into the crapper. And if enough people are losing their jobs, home buying won't pick up whether 30-year fixed mortgage rates are 6% or 4%.
I honestly don't know the answer. I suspect that all the kings horses and all the kings men (or Ben's men and women on the Fed, for that matter) can't put the biggest real estate bubble in U.S. history back together again. But we'll know soon enough.
http://interestrateroundup.blogspot.com/
Posted by: Mike_in_Fl | Sep 25, 2006 2:27:15 PM
Invenotries of existing homes are the highest they've been since '93 AND the homebuilders are struggling with spikes in inventory due to cancellations and Lereah says prices will start going up again early next year?
He either doesn't care about his reputation, he is delusional, or he thinks the public are morons.
What an idiot.
Posted by: S | Sep 25, 2006 2:39:09 PM
S. Lereah will keep spouting nonsense as long as the press keeps quoting him. No real signs of that slowing yet.
Posted by: KirkH | Sep 25, 2006 2:48:42 PM
The median home price was already falling in real terms. But the media doesn't like to consider inflation. House prices are falling quite a bit even if we believe the Fed's inflation stats and the NAR's housing stats.
Posted by: Brian | Sep 25, 2006 3:15:50 PM
My how quickly things can change
http://seattletimes.nwsource.com/html/realestate/
Aid for home sellers without a prayer (Wed, 9/20)
Real estate cool-down sends chill through appraisers | Nation's Housing (Sat, 9/16)
Rising mortgage rates push up foreclosures (Sat, 9/16)
Experts see home-price slide continuing for possibly two years (Sat, 9/16)
Seller financing one way to finesse home purchase | Real estate how-to (Sat, 9/16)
Area's home prices idling as buyers take more time (Wed, 9/13)
Area home prices nearly flatten, still up since last year (Tue, 9/12)
Posted by: Bob A | Sep 25, 2006 3:16:24 PM
We need to realize that Lereah works for the NAR. If he tells the truth he gets fired.
CNBC has been doing an amusing piece about the President of the NAR Tom Stevens. His own house has been on the market for over a year. They interviewed him and his reason was that he has been traveling.
Posted by: GerryL | Sep 25, 2006 3:18:20 PM
Why is the market at 5 1/2 year highs if everything is so BLEAK ? i thought the market prices in the futures. another question > WHAT IS WITH ALL THE BUY BACKS ? That is the only thing keeping EPS up. Its pathetic even super growth company HANS is doing a buy back.
Posted by: cris | Sep 25, 2006 4:44:41 PM
Very strange stock market today. Home prices fall; oil prices rise; bond prices rise; stock prices rise.
It's like the bond market and stock market exist in two different realities.
Personally, I'm in the bond market camp.
Posted by: ac | Sep 25, 2006 4:50:50 PM
A few points:
I'm always interested in getting an estimation of the amount of money floating around. For my bar napkin calculation, i just examined (% change in average price)*(% change in rate of existing home sales) to get an idea of the % drop (from last year) in money going after exiting homes.. here's what I can glean from the EHSReport.xls.
U.S.: -13.9%
Northeast: -13.0%
West: -22.5%
South: -10.9%
Naturally, with the money fleeing new developments (which aren't included in the stats) as well.. this suggests that a lot of money has moved somewhere else. An obvious destination would be equities, for the time being.
So.. money is fleeing real estate... I'd have to calculate the month to month % decreases in my "bar napkin volume" to see whether this fleeing is accelerating or not.
I hope I'm not being too vague and lazy.. I'm just meaning to capture the total volume of money involved with existing homes.
E.G. Even if the mean home price was 85% of last years.. the total volume of money would be the same if the annual home sales rate increased by about 17.6%
Anyhoo, not sure how much value anyone would glean from this method.
Cris,
In regards to stock buybacks.. a naive explanation would suggest that companies are performing buybacks to allow insiders to sell without harming the stock price.
e
Posted by: eli | Sep 25, 2006 5:45:48 PM
Norman -
I would guess over the ten year period I have lived on the north shore of Long Island, NY the monthly payment on a 30 year mortgage has increased in our area by ~7% annually.
10 years ago median sale price was ~ 300k and 30 year mortgage ~ 7.25% resulting in a ~$1650 / month payment.
Today the median sale price ~ 750k, 30 year ~ 6.125% resulting in a ~ 3650/month payment.
Posted by: kevinmr | Sep 25, 2006 6:19:34 PM
