U.S. home sales plummeted in July to a level not seen in more than a decade, spurring fears of renewed weakness in housing prices and the broader economy.
Sales of previously owned homes fell 27.2% from June to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday,( the lowest level since the industry group started its tally in 1999). Sales of previously owned homes fell 27% in July as market signals Tuesday deepened worries over growth
The expiration of a home-buyer tax credit in the spring was expected to damp buying, though less severely. Economists said the sales drop—together with a corresponding rise in the inventory of unsold homes—meant another decline in housing prices was on the horizon. House prices had stabilized last year after declining since 2006.
High unemployment and meager wage growth already are driving many Americans' reluctance to make major purchases, so a return of falling home equity could further depress confidence and consumer spending.
"At this point in the recovery, every little bit counts," said economist Paul Dales of Capital Economics. "A double dip in the housing market and house prices would not be enough to generate another recession. It would certainly help to hold back the recovery." He expects home prices to fall another 5% after a 30% decline during the recession.
Weitz- This bugs me…Economists claim that we are not in a recession because GDP is increasing…GDP can be tweaked to look a lot better than it actually is. Tell the hundreds of thousands of those that continue to be un-employed or are underwater in their homes that we are no longer in recession.
The renewed worry about housing comes as economists downgrade their forecasts for the economy this year and early next year. Traditionally, the housing sector, along with purchases of durable goods such as furniture, would help pull the economy out of a recession as lower interest rates spurred higher demand. But this time, potential home buyers either don't have the jobs or savings to jump in or are wary of another decline in the market.
A sharp drop in mortgage rates in recent months appears to be doing little to stimulate demand. The average rate on a 30-year fixed-rate mortgage has fallen to less than 4.5%, reaching 50-year lows, but demand for new loans is weak. Many borrowers face challenges qualifying for loans because they have lost their jobs or aren't making as much money. Some are simply growing more cautious.
While tax credits to spur home sales helped stabilize housing markets across the country over much of the past year, the expiration of that stimulus in April has revealed lingering problems that have restrained housing.
Buyers who signed contracts by April 30 have until the end of next month to close on those sales and receive credits worth as much as $8,000. Sales of homes priced between $100,000 and $250,000, which would have received the biggest benefit from the tax credit, were off 35% in July from a year ago.
The number of unsold homes on the market grew by 2.5% to nearly four million in July. At the current sales pace, it would take 12.5 months to clear that inventory, the highest level in more than a decade.
Weitz – this coupled with the lack of demand almost guarantees continued price declines.
How long the hangover from the tax credit will last depends on how long the economy takes to recover. Tuesday's housing report was "a wake-up call to anyone who's trying to understand why housing has not been recovering," said Ivy Zelman, president of housing-research firm Zelman & Associates. "The artificial boost from the tax credit masked the impediments."
Nearly one in four homeowners with a mortgage owes more than their home is worth, which means many are unlikely to sell unless their lender approves a short sale, in which the home sells for less than the amount owed.
Price declines could be shaped largely by how banks manage the volumes of more than five million loans that are either seriously delinquent or in foreclosure. If more of those loans are modified, or if the homes sell through short sales, that could spare the housing market from bigger price declines.
Weitz – This is a hugely important issue. The ‘shadow’ inventory (ie. Bank owned homes) is enormous. If the banks decide to start putting homes on the market, it will further increase the inventory of homes and provide further price declines provided the demand remains anemic.
One troubling sign for the market is that banks appear to be listing more homes for sale, just as demand has dropped. The number of bank-owned listings increased 12% in August from the previous month. The figures, tracked by Zelman & Associates, include listings for the top 10 U.S. banks in 20 states and from mortgage companies Fannie Mae and Freddie Mac.
Price declines could lead to more delinquencies and foreclosures, and additional subsequent price drops. "You end up in a home-price-depreciation death spiral," said Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York. "It's not clear there's enough demand to handle this overhang without another round of price declines."
The median sale price increased 0.7% from one year ago to $182,600 in July, but that was down 0.2% from June. Median prices largely show the shift in the mix of homes that are selling, and analysts attributed the annual increase to a declining share of entry-level home sales.
While prices are expected to fall, fewer analysts expect double-digit plunges, in part because prices in many markets have already fallen sharply.
Weitz – I would highly disagree with this. Given the imbalances in supply vs. demand, I anticipate significant declines 10%+ (unfortunately).
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