Why Don't Big Housing Sales Drop Produce Big Price Drops?

Friday, August 25, 2006 | 07:26 AM

Marketbeat observes "one puzzle about yesterday's existing-home-sales data from the National Association of Realtors is that, while the number of sales plummeted and inventories rose to a 13-year high, the median price nationally was up year-over-year.

I was just discussing this with someone over the weekend; I found two possible explanations for this: one nefarious and one less so.

The reported measure of Median home price sales is impacted by both the region where homes are selling, as well as the size/price of the house. While this mix should (more or less) average out over time, there will be periods where it might get skewed.

I suspect this is one of those times.

For example:
Let's assume the hottest areas that have seen the most price appreciation have cooled off dramatically. Much fewer homes are selling today in Miami and Las Vegas. Existing Home Sales in the North East dropped 12.5%, and plummeted 18 out West. However,  the Midwest fell only 10%, and the South fell 7%. Backout the hot areas of these last 2 (Chicago and South Florida) and the cooler areas of the country where prices haven't gotten ridiculous are likely still selling in decent, "non frothy" numbers.

Another factor: less starter homes and lower end housing sales. Given the home affordability index is at 15 year lows, and rental prices have moved significantly upwards, we are likely seeing a mix of homes skewed much more towards the upper than lower ends of the spectrum. As more people get priced out of the home ownership market, we will see less "starter" homes, and more higher end (but not neccessarily McMansions) Houses sold. This could have the effect of making median price changes appear steady.

So we may be seeing the hottest areas unit sales drop a lot, and the cooler areas maintain some semblance of normality; At the same time, a lot higher percentage of big houses are being sold than last year, it may make prices appear steady -- but we know they really aren't.

One of the more nefarious sources is that new homes are throwing in lots of seller's concessions. I've seen ads for free cars, free landscaping, free mortgage payments, free granite counter tops, subsidized mortgages -- even (literally) the kitchen sink. Any seller's concession on a new or even an existing home makes the sale price appear far greater than it actually is, hence, skewing the data to the upside.


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UPDATE August 25, 2006 9:24am

I wrote this last night, and cleaned it up and posted it earlier this morning -- then on the train into work, I see this NYT story:

Home for Sale, by Anxious Owner

Home sales are falling rapidly, and the number of houses on the market is surging. Yet each new economic report offering evidence of a housing slowdown also shows that the national median home price has continued to rise over the last year...

“We don’t have any house price indexes that get it right,” said Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania...

That sounds about right. Once we look at the specifics, incentives seem to be rather aggressive:

"The typical incentive package from a home builder consists of upgrades to the house — granite countertops instead of humdrum tiles, stainless-steel refrigerators and stoves instead of plain white models and wood blinds instead of plastic. At the extremes, some have thrown in $30,000 swimming pools.

Buyers who demand discounts often get them in the form of excused closing costs or low interest rate loans made by builder-affiliated mortgage companies.

On the west coast of Florida, builders are advertising incentives like upgraded countertops, interest rate promotions and cash rebates totaling $40,000, or 6.6 percent to 8 percent of the sales price, on homes that sell for $500,000 to $600,000, said John Dew, a real estate agent in Naples."

The reality is that home prices have probably fallen 10% already . . .

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Sources:
Rents Are Rising Rapidly After Long Lull

EDUARDO PORTER
NYTimes, August 19, 2006
http://www.nytimes.com/2006/08/19/business/19rents.html

Home Sour Home
Jesse Eisinger
WSJ, 1:43 p.m., August 24, 2006
http://online.wsj.com/article/SB115642212339744399.html

Home for Sale, by Anxious Owner
VIKAS BAJAJ and DAVID LEONHARDT
NYTimes, August 25, 2006
http://www.nytimes.com/2006/08/25/business/25home.html

Friday, August 25, 2006 | 07:26 AM | Permalink | Comments (63) | TrackBack (1)
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Listed below are links to weblogs that reference Why Don't Big Housing Sales Drop Produce Big Price Drops?:

» Home Prices Drop; 1st time in a Decade from The Big Picture
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% lowe... [Read More]

Tracked on Sep 25, 2006 12:55:13 PM

Comments

Thanks goodness corporate execs won't lose money when they sell their million dollar homes thanks to the generosity of their helpless, hapless shareholders (see Slate article and Nike and Ebay etc...). This really smells bad.

Posted by: doh! | Aug 25, 2006 7:47:21 AM

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