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

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


Existing-Home Sales Down With Softening Prices
Walter Molony
National Association of Realtors, August 23, 2006

MarketBeat: House of Pain
Housing Prices On the Decline
David A. Gaffen
WSJ, September 25, 2006 12:00 p.m.

Existing Home Sales Bullish!
Kevin Depew
Minyanville, Sep 25, 2006 10:11 am

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%
Globe and Mail (Canada), September 25, 2006 12:00 p.m

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What's been said:

Discussions found on the web:
  1. angryinch commented on Sep 25

    To use realtor parlance, the housing market will be a “handyman’s special” for the next year or two.

  2. Mark commented on Sep 25

    What news did I miss for the 60pt moonshot at 12:15pm?

  3. Michael C. commented on Sep 25

    >>>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?

  4. KP commented on Sep 25

    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.

  5. Minmex commented on Sep 25

    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?

  6. GerryL commented on Sep 25

    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?

  7. Sherman McCoy commented on Sep 25

    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.

  8. UST commented on Sep 25

    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?

  9. Norman commented on Sep 25

    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.

  10. Larry Nusbaum commented on Sep 25

    “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

  11. KirkH commented on Sep 25

    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.

  12. Mark commented on Sep 25


    You forgot to post the link to your real estate blog and your book.

  13. Mike_in_Fl commented on Sep 25

    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.


  14. S commented on Sep 25

    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.

  15. KirkH commented on Sep 25

    S. Lereah will keep spouting nonsense as long as the press keeps quoting him. No real signs of that slowing yet.

  16. Brian commented on Sep 25

    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.

  17. Bob A commented on Sep 25

    My how quickly things can change

    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)

  18. GerryL commented on Sep 25

    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.

  19. cris commented on Sep 25

    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.

  20. ac commented on Sep 25

    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.

  21. eli commented on Sep 25

    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.


    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.


  22. kevinmr commented on Sep 25

    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.

  23. Cherry commented on Sep 25

    Stocks are completely lost right now, almost 29ish in how lost they are. The Economy has landed hard, but the idiots still can’t see the writing on the wall.

    Of course that is exactly what I have been predicting, thus the 2500 point loss in a short period of time is possible as they lose all confidence in a soft landing and the realities of a weak economy. The wheels come off, panic selling begins, Options sell in the response they have been waiting…………thump.

    Tick tock, tick tock, tick tock……………

  24. Robert ben Kline commented on Sep 25

    Tonight, a Boca Raton broker, Ken Brown, with a daily 5-6pm commentary program on the local business radio station (WSBR),had an interesting take on the housing market downturn. (I listen to him if I am driving my car at that hour, which is not often.) He said that today’s conditions look like the economy (and market) of the late 60’s. The ending of a bull market in real estate in particular worries him. We will then head into a recession like we had in the 70’s. the stock market will follow suit, with a multi-year bear. He spent a good 40 minutes of his show on this explaination(or I should say predictiion), so my summary doesn’t do it justice.

  25. Barry Ritholtz commented on Sep 25

    Hey Kids, its the last week of the Quarter — that is all you need to know about stock prices!

  26. whipsaw commented on Sep 25

    per BR:
    “Hey Kids, its the last week of the Quarter — that is all you need to know about stock prices!”

    True dat Barry, and also the FY end for a lot of entities, so shouldn’t we expect to see some hard selling of losers along with artificial runups as the mavens dress their windows?

    And does anyone else sense that XLE is bottoming this week? I’ve gotten burned on those calls before, so I’ve got a score to settle and am thinking that they may not get much cheaper before they get a lot more pricey. It looks like a bounce is due even if only short term and it would be nice to mitigate my previous loss.

  27. Geoff commented on Sep 25

    Dont go for xle just yet… you should be going into defensive mode right now, if you havent figured it out already. Youve got a few days left to sell and move to cash, before the market heads for the crapper.

  28. TMT commented on Sep 25

    Did Lereah used to be known as Baghdad Bob?

  29. whipsaw commented on Sep 25

    per Geoff:
    “Dont go for xle just yet… you should be going into defensive mode right now, if you havent figured it out already. Youve got a few days left to sell and move to cash, before the market heads for the crapper.”

    I’ve been in defensive mode since March, but am more or less risk neutral now having a slew of November QQQQ/DIA calls against March SPY/CFC puts along with some April GDX calls. I came around to the view that the large cap indices were going UP UP UP! in spurts until the elections, then the whole thing is going DOWN DOWN DOWN! so I am trying to ride the elevator both ways via time horizons. Where XLE figures into things is that energy has crashed so hard, so fast, that reversion is likely and if I can scalp a 50% gain against some cheap calls over the next few weeks, so be it.

    But I’ll wait and see what happens the rest of this week, partly because I don’t think that we’ve heard the last of Amaranth’s energy positions being unwound.

  30. donna commented on Sep 26

    I got a full marketing package from a realtor today with a ton of info in it – all the info on our house, neighborhood comps, full market analysis, selling strategies, the works.

    These guys have way too much time on their hands right now.


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