The WSJ’s Justin Lahart notes why we saw an increase in New Home Sales last month beyond the weather: Builders are lowering their prices:
"January’s warm weather was one reason for the pickup in sales — but not the only one, according to Oscar Sloterbeck, head of ISI’s survey group. Many builders have been throwing in sweeteners, like flat-panel TVs and better floors, to push sales without having to lower prices. Even so, Mr. Sloterbeck believes some builders have lowered prices to bring customers in.
That is in keeping with what was happening in previous months. In December, the average price of a new home was $272,900, according to the Commerce Department. That was 8.9% below September’s $299,600 — the biggest three-month percentage drop on record. The median price (as opposed to the average price) fell by a slightly smaller 7.7% to $221,800. That is an indication that more expensive homes have seen the steepest price declines.
Prices for existing (that is, previously owned) homes, on the other hand, have registered only slight declines. One reason is that builders are much more motivated sellers than the average homeowner is."
The significance of this is greater than mere Real Estate pricing. As we have discussed for oh so long, this appreciation has been the key to ongoing consumer spending:
"But even if prices for existing homes stay put, that may present other problems, says Lehman Brothers economist Joe Abate. Homeowners have used rising home values to fuel their spending, usually extracting money through mortgage refinancing. If home prices aren’t rising, that spending spigot could run dry. Moreover, long-term interest rates are expected to rise, which could further crimp the refinancing game."
The impact of falling prices has a end game that is potentially very negative — I’ve "war-gamed" various scenarios, and one possible finale is a wave of defaults.
"The big unknown, says Bollinger Capital Management head John Bollinger, is what will recent buyers — many of whom have put down little or no cash to buy their homes — do if the real-estate slowdown steepens. They may not be as motivated to hang on to their homes as traditional homeowners, he thinks, and many may end up simply handing lenders their keys."
While that’s a real possibility, I’m much less sure than John Bollinger as to it ending that poorly. He’s referring to what really is a worst case scenario . . .
AHEAD OF THE TAPE: Home Woes
WSJ, February 27, 2006; Page C1