Existing-home sales fell 4.1% in July. That’s a hefty drop, although the annual pace of sales is still a relatively healthy 6.33 million units annualized pace. Yes, its the the lowest since January 2004, but do remember that 2004 was a record year, as was 2005.
Inventories continuing to rise sharply, while prices are softening, and the gains were the sharpest on record.
Overall existing Sales are down 11.2% over the past year.
Today’s housing report was a market downer: The Dow went from plus 20 to down 25 in a short time.
>
Sources:
Existing-home sales plunge to a two-year low
Inventories of unsold homes rise to 13-year high
By Rex Nutting, MarketWatch
Last Update: 10:19 AM ET Aug 23, 2006
http://tinyurl.com/gjjq3
Existing-Home Sales Dropped 4.1% In July to Lowest Level Since 2004
WALL STREET JOURNAL ONLINE NEWS ROUNDUP
August 23, 2006 11:00 a.m.
http://online.wsj.com/article/SB115633540228043288.html
I am going to make the claim that this is not just a blip. It is a trend line that will be with us for 2 years.!
I’m not sure it’ll be so quick; the ’89 peak didn’t shake out completely for at least five years. That doesn’t mean nominal prices need to go down, but they’ll stagnate and volumes will be tepid until residential pricing gets back in line.
“That’s a hefty drop, although the annual pace of sales is still a relatively healthy 6.33 million units annualized pace.”
Can someone take pity on this student of the trade? I don’t understand how this conclusion reconciles with the chart in the post.
CHEERS!
D
just saw Leareh, Realtor’s cheerleader, on CNBC calling for 5-10% reduction in house prices to break the standoff betw buyers-sellers and get this market moving again. now, why cant respectable stock market seers do the same.
El crappo! More months of “tough love” are probably in store to cure radical imbalances. The bitter pill will be hard to swallow–a recession might follow in short order–but as with all hangovers, the morning after is seldom pretty.
student: Observe that the graph does not start at zero.
“”That’s a hefty drop, although the annual pace of sales is still a relatively healthy 6.33 million units annualized pace.”
Can someone take pity on this student of the trade? I don’t understand how this conclusion reconciles with the chart in the post.”
Single-Family v. all Existing (Single-Family + Condos)
Well, we had rates at 40+ years record lows, so maybe the market will bottom when home inventory hits 40+ years record high.
Or is that too pat…
If the Fed drops interest rates like a rock then we may see a soft landing. Because of that uncertainty I’m not yet willing to make a call on this. However it seems that businesses are not going to pick up the slack where consumerism has been declining, so perhaps the Fed will think it can sustain the economy by bolstering consumerism and waiting for businesses to pick up the pace on hiring and wage growth.
It’ll be interesting to hear how the Fed will advise on the use of risky mortgages, because with strong wording they could possibly justify lowering rates again to bail out the housing industry and fix Greenspan’s mistake.
Some areas will drop a lot more than others, but I expect the second home market to be hit badly, which is good news for people who have been in the market for a vacation home for a while.
7.3 is the key number (months of inventory). And it is still increasing at an accelerating pace. Not even a scent of the rate of increase is slowing. This is not near done.
This is just the beginning. The Wall St Journal has an excellent front page article on a homeowner from my area (DC metropolitan). Her house appraised for $1.1 million last year, and she settled for $525k at an auction this year. There were only two bidders!
I hate to think of what will happen to comparable values on appraisals when people go to purchase or refinance if this keeps up. The LTV’s are going to hit the stratosphere.
Maybe lenders will invent the NEW 175%LTV Loan! Being a mortgage broker, I don’t know whether to laugh or cry?
>>>…with strong wording they could possibly justify lowering rates again to bail out the housing industry and fix Greenspan’s mistake<<< Fix? Funny choice of words. Lowering rates again to bail out the housing industry would, yes, be like giving a crack addict his fix just to treat his withdrawal problems.
Advsys,
You said,
“I’m not sure it’ll be so quick; the ’89 peak didn’t shake out completely for at least five years. That doesn’t mean nominal prices need to go down, but they’ll stagnate and volumes will be tepid until residential pricing gets back in line.”
The ’89 shake out did not have as many people with toxic loans and also did not have the push for everyone to get into a house by Fannie Mae and with it a lessening of lending standards with excessive sub-prime lending.
I predict the ARM and IO resets are a decidedly different variable this time around that should not be discounted. They will play heavily in how ugly this will get.
The trend that housing has shown over the past year will pretty clearly keep going for quite a while. But I think July was anomalously low — it was the hottest July nationwide since the Dust Bowl. I can’t imagine wanting to look at houses in, for example, Sacramento, when it’s 115 degrees outside.
I think a huge impact which isn’t being discussed of today’s housing data will be to consumer sentiment.
With sentiment already weakening as shown from last week’s numbers, today’s news will worry the housing levered consumer that much more. It’s the top story of msnbc.com and several other sites.
But I hate counting out the consumer because I’ve seen year over year that they have endless ways of financing that 51″ big screen tv – from 0% financing to HELOCs to “borrowing” from the local costco!
>>>I can’t imagine wanting to look at houses in, for example, Sacramento, when it’s 115 degrees outside.<<< How funny! My wife and I went to the Grand Opening of a new community just to get the free food and hide in the over AC'ed model homes.
Home sales drop 4.1% in July, median prices drop in most regions
Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years and the inventory
bj,
The data reflects closings from July, which means the sale took place in May or June. That bad weather will be reflected in Sept/Oct data.
Petrol Futures break support to a March low, Arnie you dont need to jack-up the min. wage to get re-elected you dont have any comp!
With energy still at a 20% “hot money” premium and jr. gold miners up 20%-30% in the last 3 weeks, dont see the pricing power here folks. Time to go shoping for real estate, this market will miss this cash to break resistance!
If the Fed drops interest rates like a rock then we may see a soft landing.
I think this is unlikely simply because mortgage rates don’t have far to drop. If they were on the order of 8-9%, that would be one thing, but right now they’re only a little over 1% above their 2005 lows.
Plus this correction has been primarly supply-driven so far. Lower interest rates do not cause excess inventory to vanish, and until it does I think buyers will now be too frightened to jump in until prices decline significantly.
and Lenders lower the bar even more
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One thing I see missing from housing bubble analysis is a catalyst for home owners dumping their homes. I think we all agree that the era of double-digit appreciation is gone and too much building and inventory has led to a supply glut.
But housing starts have slowed and the population continues to grow. Folks will decide that living in a home is better than living in a cardboard box on the side of the road. 70% of folks own their homes, and I don’t think that’ll trend down significantly.
So where is the catalyst for a large drop in housing prices? Rising unemployment? That’s what happened in the 90’s as military base closures hit some hot areas. Is anyone here predicting rising unemployment over the next few years?
Barry, what’s your catalyst for folks dumping their homes in the ‘burbs “at any price” and choosing to move to an apartment or a cardboard box on the side of the road?
Michael C., you’re right about lowering rates anytime soon would “be like giving a crack addict his fix”. In fact, that fix would give him a “40 year high” and send him on a soft landing into a pile of sh*t.
wonder what they’ll call it this time around
“Resolution Trust Corp., the agency created to untangle the savings-and-loan mess of the 1990s. …”
The catalyst for renting rather than buying is that rent is roughly 55% the cost of interest payments on an asset whose purchased was based primarily on speculation of appreciating value. Values fall, those on the margin who were subsidizing the interest payments with cash out refinancing fall by the wayside. And you get houses that were once valued at 1.1million auctioned at 550k as noted above. For many, it’s just no an option to continue making the payments.
So where is the catalyst for a large drop in housing prices?
The catalyst is that people have purchased homes that they can’t afford with their wages alone, assuming that the appreciation of the house would bail them out in a few years when their payments reset. How can homes maintain 50-100% price increases in many areas during a period where wages have been mostly stagnant?
They cannot.
Not without some sort of supplementary income or rapidly rising wages (not happening so far). That source of supplementary income is now gone with the stagnation in home prices.
Now we face a potential onslaught of defaults and foreclosures. Historically, a large rise in foreclosures is associated with sharp price declines. I’m guessing this isn’t mere correlation.
So where is the catalyst for a large drop in housing prices?
you seriously can’t think of any? maybe defaults from over-extended consumers who can no longer afford their adjusted mortgages? specs who need to dump cuz they can’t make payments on their loans? publicly traded builders incentivising the hell out of their inventory to get it off the books?
one of these happening, meh, no problem. builders, for instance, overextended themselves before and got the poop kicked out of them. but the country was fine. this time, though, so many more have been making their first million in real estate. damn certain they don’t want to lose it. are they going hold on during a dip, knowing that 5 years from now they’ll get their money back?
on top of it, i don’t think it takes many auctions or below asking price sales to cause concern. hell, just one nearby can be worrisome. friends of ours just watched a condo in their building go for about 4% under asking. given their need for space (a growing infant) and a better school district, they are more than a touch worried. when it comes time to sell (which by their timetable is months), they’ll need to do so and the most recent precendent (the only one that matters) doesn’t look good for them right now. if they get less for their condo, their trade-up will have to be less (i.e. they won’t be paying asking for their home), thus rippling up the chain.
“So where is the catalyst for a large drop in housing prices?……..”
Your catalyst in a housing slump is usually high unemployment or high interest rates. This time it is different (for once). In the highest appreciation areas and to a lesser extent nonbubble areas, people used more and more exotic loans to get into their houses with subprime, ARM, IO and payment option ARMs. These loan products were affordability vehicles.
Now depending on what numbers you arre more comfortable with, either $1.9, $2.1 or $2.7 trillion worth of ARM loans are resetting this year and next. in 2006 it will be only roughly a third of the total resetting. I think this is the reason for the high inventory right now, people are bailing. Next year will see an even worse situation. If you look at this segment of the outstanding debt it make up 20-30 % of the total from #s I have read. So there is your catalyst.
<< Funny choice of words. Lowering rates again to bail out the housing industry would, yes, be like giving a crack addict his fix just to treat his withdrawal problems. >>
Yeah, the double-entendre with “fix” was intentional :) It doesn’t correct problems plaguing many aspects of our economy right now, but it would certainly allow the market to continue to delude itself that all is well. Since the Fed has been known to make political calculations, such a thing wouldn’t surprise me. And our gov’ment has bailed out other industries before, so perhaps they’re interested in giving housing a turn.
My only uncertainty of the housing market is whether or not the Fed will admit that it *needs* to have a hard correction to revert to a stable mean and splash some cold water in the face of consumers and investors.
Some have said that this the housing boom grew out of investors who were burned by the stock market but still wanted a piece of the double-bagger pie. Such sentiment needs to be slapped off the solipsistic faces of Americans with an exaggerated sense of entitlement and self-worth.
The consensus here seems to be that rising ARM rates (and other risky loan schemes) will force consumers to sell their home “at any price” as their payments skyrocket.
What if interest rates come down? What if the Fed is done with rate hikes? And what about wages, that are now growing according to the monthly stats?
I still think you need to see rising unemployment. Otherwise, folks will get up to their alarm clocks, go to work, come home and have dinner, watch American Idol at night, and go on with their normal lives. Once a month they’ll sit down to write that check to the mortgage company. Life goes on.
Lowering rates again to bail out the housing industry would, yes, be like giving a crack addict his fix just to treat his withdrawal problems.
Fabulous description. Nail + Hammer + Head.
Michael C., love the crack addict analogy.
Several folks commented that my 2 year time frame may be too short. No real argument with that. 2 year was my low end.
Muckdog. prices will drop for several reasons. First off the laws of supply and demand. There is a huge supply of houses that are owned by investors. Folks who did not ever intend to live in them. There is still a lot of housing under construction etc. As that inventory comes on the market we all know what it will do to pricing power.
if one does not own a house, then your other choice is to rent. So, a normal market is one where the mortgage, taxes and insurance on a house is around the same as the monthly rent one can charge.
There are more reasons but that should do ya. Unless others want to jump in.
Hey Barry R. none of this sounds very inflationary to me! House prices cut in half and oil prices falling? Sound like the opposite of inflation to me. Would you please give Ben B. a call and ask him to start up the choppers? I think a blizzard of Ben Franklins may be better than a flurry of Andrew Jacksons at this point….
is the CRB putting in a head and shoulders top? XAU on the weekly? Take a look.
The consensus here seems to be that rising ARM rates (and other risky loan schemes) will force consumers to sell their home “at any price” as their payments skyrocket.
What if interest rates come down? What if the Fed is done with rate hikes? And what about wages, that are now growing according to the monthly stats?
Keep in mind the problem isn’t just traditional ARMs. It’s also the interest only loans and Option ARMs with low introductory payments that will reset to much higher levels regardless of what happens to interest rates.
Muckdog,
Do you do the shopping? A lot of stuff has gone up in price over the last 2 years. Not to mention gas, which at $3.00 is almost seeming to be normal. Life goes on if you can make the payments.
Cut Fed rates? Anyone been paying attention to the fed govs the last couple days?
Everyone get out of the way and lookout below!
Essentially June was a bad month, how about July and August? Worse months? How about September. Massive deflationary spiral? Helicopters getting fired up, Currency collapse then after……………it is like a Prophecy Bernanke has waited for his whole life.
FED cannot cut rates and attempt to save the housing sector and debtors until the commodity complex rolls over. Otherwise, the dollar will be decimated (good for CAT, RIG, other exporters maybe).
I lean toward stagflation, but really the lynchpin is O&G supplies. Production peaked in Dec05 at about 85Mbd. The 10 largest fields are in decline and Saudi production has been in decline even as they drill at a furious pace. True, there is an infrastructure shortage in drill rigs and the like. But the question is: will new production coming on line offset declines in the largest fields? This 2Mbd “spare capacity” we hear about is mainly heavy/sour crude from Saudis and Venezuela. It is much harder and expensive to extract and refine.
EVERYTHING hinges on crude supplies, IMO. If everything went right (Nigeria peace, Iraq at full production, Prudhoe on line, etc) we could see $40bbl. But it will not last long if it gets there. The fundamental supply/demand is reaching a critical juncture. Saudis are VERY opaque with their reserve/production data, but they admit they are in decline. Ghawar, the largest field in production is in confirmed decline. Cantarell, another HUGE field is also in decline. North Sea is in decline. Alaska is in decline.
The captain has turned on the seatbelt sign kids, so buckle up, we might experience a bit of turbulence.
The consensus here seems to be that rising ARM rates (and other risky loan schemes) will force consumers to sell their home “at any price” as their payments skyrocket.
i don’t believe this. most people do not have to sell. but at any given moment some percentage of people must. these people have outgrown their current one or are moving to a different part of the country, or rehabbed/built with the express goal of selling it.
i do not believe there will be a wholesale plunge as 7 out of 11 homeowners run for the exits. but as i mentioned above, if you *do* have to sell your house in this market and that of the next few months (years), your options aren’t quite what they were a year ago. does this feed on itself? damn straight. everything takes its cue from the last few comps. banks/lenders don’t appraise as high, buyers don’t want to pay as much, homeowners’ mental calculations change. new cars don’t get purchased, vacations are a lot closer to home, lifestyles get affected…
Here’s a question one of you probably could answer…
How does a 35% correction in home valuations in 2006-2008 let’s say, compare to the correction in the Nasdaq in 2000-2003 in total value?
“none of this sounds very inflationary to me”
…but oh isn’t the fed’s inflation rate based on rents, which are now rising, because rents are cheaper than owning, and not on home prices? So sorry charlie, even as your home value is tanking the fed says there is inflation and keeps raising rates.
With home affordability at 15 year lows, you got a lot more than 5 years worth of inflation since 2001.
Now, its the Rental market’s time to enjoy some price inflation.
j d ess,
As you are no doubt aware, in many bubble regions many of the loans taken out over the last year were IO and ARM. If you were a reader of the anotherf’dborrower blog you would also have knowledge of how marginal many borrowers were over the last two years in San Diego. Many of the people were speculators as well.
There may not be an immediate drop but what happens when all of the sudden your payment goes up $300-600 a month or more in addition to your new fuel costs . You are pinched and if you are just scraping by with your loan now you will not make it. At the very least I see severe reductions in consumer spending as a result of it. It in essence is a tax of sorts.
i don’t believe this. most people do not have to sell. but at any given moment some percentage of people must. these people have outgrown their current one or are moving to a different part of the country, or rehabbed/built with the express goal of selling it.
Don’t forget that 28% of homes purchased last year were bought solely for investment purposes. The fundamentally alters the equation and creates a class of homeowners with very different motives than you describe above.
AC,
I forgot to mention that.
Also I remember interviews 3 years ago with buyers in their 20’s buying with IOs in LA. Those should be resetting about now.
Aside from all those ARMs, add all that home equity credit for Walmart stuff, remodelling the kitchen and that new 12mpg SUV.
When the variable HE loan payment increases and there isn’t anymore gas in the tank and you can rent for less, guess what MUST give?
With the new bankruptcy laws walking away in default isn’t an option.
I’m looking for some killer deals in repos in the next year or two or ?
Is “El Stinko” some kind of academic econ term? I don’t speak spanish either.
what happens when all of the sudden your payment goes up $300-600 a month or more in addition to your new fuel costs
my point here is not that this will blow over. rather i believe that we won’t have a wholesale run for the exits. this seems to be the only way muckdog foresees a collapse.
yes, many ARMs will adjust. most will adjust accordingly. yes, there will be those who can’t afford the reset and will *have* to sell. their numbers need not to be anywhere near the majority of homeowners for it to affect housing and the economy as a whole.
don’t get me wrong, though, a lot of people will be f’d and it will hurt.
“Now, its the Rental market’s time to enjoy some price inflation.”
I don’t see how this is possible without wage inflation. And what about all that consumer debt and rising interest rates? Not to mention all the inventory that is still being built. Where does the money for inflated rents come from? With the increase in homeownership rates the credit scores of people in the rental market have taken a dive. Anyone have any vacancy rate numbers?
I have actually seen a decline in rental prices for single family homes in the DC area in the past year.
Also what happens when illegals go home due to the housing slowdown as well as if crackdowns on them occur more widespread like in Hazleton PA.
There is so much stuff that is stacked precariously in our housing market. It is like a game of Jenga and I think the last piece is being pulled.
Rental prices were held down because renters were moving out of apartments and buying condos when rates were at their lowest, because they could buy for close to rent and in addition had the hope of price appreciation. Now that pressure is off, landlords have ability to raise rents. Maybe not in all markets but in many. You can see above the or the previous topic the reference to major landlords raising rents by as much as 25% in some markets.
douglas:
Many of the residential REITs are trading at or very near 52 week highs: ASN, AIV, AVB are just a few examples.
They all underinvested during 2002-2005. Now, because vacancy rates are declining, they are able to raise rental rates. Declining vacancy rates and raising lease rates is a powerful combination for their financials.
Crunch the numbers. Based on their current lease up rates, declining vacancy rates, and fat dividends they are still cheap and the stocks will go higher.
Douglas –
“Anyone have any vacancy rate numbers?”
http://www.census.gov/hhes/www/housing/hvs/qtr206/q206prss.pdf
I think the spike in rents recently is mainly due to the huge numbers of condo conversions. But there are going to be a lot of condos that can’t be sold looking for rentals over the next year or two. There are condo projects just breaking ground still in Miami.
Something else to think about, if there is a real crack-down on illegal immigrants, what effect will that have on household formation going forward?
Bob A, that was an interesting little missive from the mortgage lender. I bought some puts on Countrywide today. I don’t suppose that came from them? ;-)
Speaking of illegal immigrants, I remember reading about a year ago that Countrywide had a program where an applicant wouldn’t need a SS#, this was to make loans available to illegal immigrants. Seriously.
i don’t believe this. most people do not have to sell. but at any given moment some percentage of people must. these people have outgrown their current one or are moving to a different part of the country, or rehabbed/built with the express goal of selling it.
A large portion of first time homeowners buying last year (who were themselves about 40% of transactions) bought with little or no equity. Even if that’s only 5-10% of the net sales last year, that’s a lot of people trying to get through the exit at once if they start to realize their “investment” has suddenly turned in to a huge, cash-sucking “liability” that’s threatening to go deeply upside-down.
Leverage is fantastic so long as the underlying asset is rising in value. When value is flat or near-flat, and resets are coming, leverage is the bouncer who comes in to kick out the weak hands.
alaskan pete,
I agree with you in the short term on energy prices. For the next few years, we will always be one Nigeria or Ahmadinejad away from shortfall so at best of times there will be a panic premium (except if there is a global recesssion, then we head back toward 1998 briefly)
However, somewhere 3-5 years old, this will start to resolve itself. Even at $40 a barrel (not to mention $70 or higher), there are lots of technologies that come into the range where a bit of R&D and scaling up turn them into moneymakers.
I am not basing this on data or hard facts. Just my sense. There are way too many bright people and organizations out there to just sit back and let oil-rentiers drain off so much of the world’s economy.
It won’t be a magic bullet though, but a hail of arrows. Energy will become much more information-driven, just as the rest of our economy has.
I haven’t found a good investment vehicle for this yet.
kevin- How ’bout SunPower?
They were touted by ahnold on his trip to china and will know doubt benefit from his recent alt energy proposal for Cawleefoneya….
Housing? The dream is over- for now.
My wife and i flipped 4 houses in 4 years. All option arm’s.
ya see, we were taken to the cleaners ($80k) by a scam artist from the O.C. in one of the longest running ponzi scams (Financial Advisory Consultants) in sec history (21years).
But we “thought” we were rich at the time which is what gave us the courage to buy our first SoCal house waaaay back in 2002 for the then mind boggling sum of $280k.
Our Ponzi scam allways DID have the feeling of “too good to be true” and housing came to aquire the same scent for us after a while….
But THIS TIME we got our $ off the table before the hammer came down. It’s funny….We wouldn’t be sitting pretty if we hadn’t signed up to get ripped off the first time.
We’re renting now (it’s bigger, cheaper-though still expensive- and all plowed into 90 day CD’s -Barry has a minimum buy in ;(- awaiting the second coming….
One last thought,
It was all psychology “going up” imo and here on in, it’s going to be all psychological “going down”
just an anecdote; I started a night class this week . 12 people in the class, 3 were condo flippers holding units they wanted out of but didn’t want to drop price.
kevin_r, sounds like you’re looking for something like the PowerShares Wilderhill Clean Energy ETF (PBW) based on the Wilderhill index (ECO).
See http://www.powershares.com/pbwfund.asp for starters.
Disclosure: I do have a small position in the fund but otherwise have no connection to Powershares, Wilderhill, etc.