Real Estate Sales Slump Generating Ugly Press

Yesterday’s Housing data is producing some pretty ugly headlines today; If the market chose to ignore the data, let me remind you that this is the last week of the quarter, so anything can (and will) happen.

Here’s how its being played in the WSJ:

"Yesterday’s report also confirmed home prices are
coming under pressure. The median sales price of an existing home was
$225,000 in August, down 1.7% from a year earlier. That was the first
year-to-year price decline since 1995 and the second sharpest in the
nearly 40 years the data have been collected.

Prices fell faster for condominiums than for
single-family homes. In August, the national median price of a
single-family home fell 1.7% from a year ago to $225,700. The median
price of an existing condominium fell 2.4% from a year earlier to
$223,200. . .

Falling prices have a flip side. If their homes are worth less,
consumers may feel less wealthy and therefore spend less on goods and
services, a worrisome trend for the broader economy. "We have to
acknowledge that this is a clear risk to the consumer," said Haseeb
Ahmed, U.S. economist at J.P. Morgan Chase & Co. In the short term,
he said the recent drop in gasoline prices should offset the effect of
declining home values."

The Chicago Tribune observed:

"At a pace that some analysts described as "astonishing," the price of existing homes declined nationally for the first time in 11 years in August, signaling that the long-awaited other shoe has finally dropped on the real estate market.

Home sales have been slowing for months but sellers appeared to be holding out to get their price. Now the pressure to sell is intensifying, leading to a drop in house values across the country."

The issue that has Economists worrying is the "housing slump’s ripple effects. Even as the boom began to wind down last year the housing market probably contributed about $2 trillion to the U.S. economy, according to the National Association of Realtors. One estimate from Goldman Sachs predicts that the slowdown will cut 1.5 percentage points from the nation’s economic growth in 2007."

Two other comments via the Trib:

"It’s pretty amazing how fast the reversal has occurred since last year," said David Stiff, chief economist at Fiserv CSW, a property-data analysis firm in Boston.

"There has never been such a quick deceleration in price appreciation," Stiff said. "I was looking at data from 1969 forward, and it’s unprecedented."

Bloomberg noted that "Home construction in the second quarter subtracted more from economic
growth than at any time since the first three months of 1991, the
Commerce Department said."

But the key issue remains the impact on consumner spending. Joseph Stiglitz had the money quote on this:

"What worries me is how long we can sustain consumption on the basis of what we have sustained it in the last several years: by taking money out of your house,” Joseph Stiglitz, Columbia University economics and Nobel laureate, said in an interview Sept. 22."

Here’s yet another chart of price changes, along with regional prices: 


UPDATE Septmber 26, 2006 5:05PM

Here are a few more lovely headlines:

Mass. home prices fall 6.1% as downturn gathers speed
Kimberly Blanton,
Boston Globe, September 26, 2006

Home prices likely to fall more
Noelle Knox
USA TODAY, September 26, 2006

Existing Homes’ Median Price Falls Decline Is First Since 1995
As Sales Continue to Slump; Risk to Broader Economy

WSJ, September 26, 2006; Page A2

U.S. Existing Home Sales Fall 0.5% in August; Sales Price Drops
Shobhana Chandra and Joe Richter
Bloomberg, September 25, 2006 10:00 EDT

Home prices finally hit wall
Decrease is 1st in 11 years; Chicago avoids drop—for now
Mary Umberger
Chicago Tribune, September 25, 2006, 10:43 PM CDT

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What's been said:

Discussions found on the web:
  1. erik commented on Sep 26

    with so much possible pain unfolding, what’s the odds of an emergency rate cut, similar to the 1998 cut that proped up the equity market?

    the equity and housing market are riding the same wave here. one market needs to be kicked higher to avoid declining assets across the board. just as when two waves run into each other in the ocean and heighten the wave’s overall strength and height, that troubling effect will unfold if housings slump and the upcoming equity downturn coincide with each other.

    a softening commodity picture just may give the fed some room to loosen.

    in any case, i think the next “big” thing is what’s going to happen when china has a hard landing. that economy has been running like a freight train and one of these quarters the train is going to come off the tracks. i still believe they will be the economy of this current century, but similar to our ramping economy of the late 20’s, when we feel sick, the world got quite ill as well. i feel better that paulson’s on the job, but how much can one man do to contain innevitable groing pains?

  2. Leisa commented on Sep 26

    In Richmond VA, the headline today is that the average price of a house climbed 10.6% from 256.4K to 283.6K. Now, I understand all of the qualitative issues with that–we’ve had quite a build in upscale housing. Nevertheless, sales of homes have dropped 6.5% from 08/2005. We’ll see how that affects pricing down the road.

    I continued to be amazed by the abundance of diverging opinions regarding the effect of housing on consumer spending. It feels like to me that either I’m in some sort of delerium or everyone else is. Whichever it is, it is uncomfortable and unfathomable.

  3. gg commented on Sep 26

    I still don’t feel like the shoe has dropped though. Median prices could be dropping because people are purchasing smaller places – a natural effect of higher interest rates. I feel like prices will go down, but they haven’t yet.

  4. Craig H commented on Sep 26

    Haven’t seen anything about this on Bubblevision (CNBC) but Bloomberg has video of Paul Volker complaining about a tolerance for higher inflation.

    I thought this was a pretty severe dis of “the helicopter” (and also his predecessor perhaps), being that it came from Volker.

  5. lurker commented on Sep 26

    This all will be an interesting test of “the wealth effect” in reverse. Along with all the many many jobs dependent on real estate, which Barry has examined thoroughly here, it is very difficult for me to see why the average consumer will feel like firing up the old credit card when they read (everywhere!) that the value of their home is falling… but we will see. The demise of the American consumer has been incorrectly forecast so many times before that Cramer does not believe it can happen. Perhaps that is the “tell” we have been waiting for. House of Pain! One thing I truly believe is that if US consumer spending really does slow sharply then China could be in trouble and a very negative feedback loop could begin to take hold.

  6. blam commented on Sep 26

    The end of the quarter is Friday. All bets are off next week.

  7. ac commented on Sep 26

    Some quotes from the above USA Today article:

    “The housing bubble has burst; this is just the confirmation.”

    “The housing market is in trouble right now.”

    “We have a serious correction taking place in the housing sector.”

    “The speed of the collapse has been astonishing.”

    “If we have prices drop for the rest of the year and sales also continue to drop, then we will have a bad situation in housing of balloons popping rather than air coming out,” Lereah said.

  8. M.Z. Forrest commented on Sep 26

    How can we have bubble burst on a one month decline? If anything this sharp decline pretty much insures we get a dead cat bounce in housing. When local declines around various parts of the country start measuring around 50% from peak, I’ll start getting excited. We aren’t even at the point of having 3 years of gains erased in any market.

  9. AC commented on Sep 26


    Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co. In the short term, he said the recent drop in gasoline prices should offset the effect of declining home values.”

    Ok. So let me see my home values drop by 1000s of dollars but hey I am saving an extra 10-20 dollars a week at the pump.

  10. S commented on Sep 26

    Richmond FED manufacturing index rebounded to 9 from August’s 3.

    They’ve got their rally hats on again (at least until quarter end).

  11. jon low commented on Sep 26

    According to today’s Palm Beach Post, prices of existing homes in Palm Beach County have dropped for the first time in seven years and the number of houses on the market has more than tripled. PB County led the state in declining home sales. This may be significant given the degree to which this market – as a second home site – is tied to markets in the Northeast and Middle Atlantic states.

    One realtor is quoted as saying sellersremain ‘aggressively overpriced, at levels that exceed last year’s prices.’ This would suggest that prices will decline further as reality sets in.

    A particularly noteworthy quote, “It is easy to buy the elephant. Mortgages rates are still reasonable. The challenge is to feed the elephant in an environment where wages and income are not keeping up with outrageous property taxes, property insurance and energy costs.”

  12. lurker commented on Sep 26

    I like the elephant quote. So true. And she never forgets, or stops sending bills. Paid my water bill this morning and I guess the elephant was pretty thirsty.

  13. The Theroxylandr in Flame commented on Sep 26

    Bushnomics: the floor is falling

    The Greenspan Bush games with taxcuts, budget deficit and 1% fed rate are going too funny now. This is the

    Do you want to see September data? I dont have them yet, but I bet you it should be so much more funny. Greenspan was a funny guy

  14. T commented on Sep 26

    How can we have bubble burst on a one month decline? If anything this sharp decline pretty much insures we get a dead cat bounce in housing. When local declines around various parts of the country start measuring around 50% from peak, I’ll start getting excited. We aren’t even at the point of having 3 years of gains erased in any market.

    This isn’t equities… you’re not going to see those kind of corrections in a class that’s still, after all, somewhat asset-based. However, this is one of the few classes where almost all holders are significantly levered, especially the more speculative / aggressive buyers of the last 5 years. Tolerance for pain is much lower when your equity is only 20% of the headline asset value — essentially, any loss is 4x the nominal change in value. A 5-10% drop can mean a 30% hit for many people on what is by far their single largest invesment. Especially worrying for those within 10 years of retirement that were counting on that equity to grow.

  15. snook commented on Sep 26

    The quick drop in the HGX does not surpise me AFTER such a strong run up on give away lending. waiting for the other shoe to drop >> higher supply leading to another drop in residential home prices.

  16. snook commented on Sep 26

    This gasoline price drop predicted consumer, homeowner euphoria in the US is somewhat disturbing as we are seeing droping oil product prices as a normal function of seasonal production changes an user demand….nothing profound. The removing of the ‘terror premium’ in oil can be reinstated ovenight (lets hope not).

  17. M.Z. Forrest commented on Sep 26


    On a large scale I would not. There should be some markets out there feeling real pain however, for the media to describe it as a bubble bursting. I would not expect a 50% drop in half the markets in the country, but there should be a few that approach that level if we are trying to call a bottom. I’m thinking of specifically vacation and second home markets. A few peak markets off 5% just doesn’t strike me as the bubble having burst.

  18. dave commented on Sep 26

    Some people mentioned the “magazine cover effect”: the top is in (or very close) when a company/stock is touted on the front cover of some magazines.

    I guess it might work the other way as well, recently bad news, one after another are shown on TV and all other forms of media. Yet the homebuilder stocks refused to go down any more, in fact, they went up quite a bit.

    Maybe the bottom is in, at least for an intermediate term. While some people are still banging the drums on how badly the housing bubble is going to burst, some quiet people are making a good bit of $$$ the last few weeks.

  19. donna commented on Sep 26

    Dave, the bottom ain’t coming in on this one for quite a few years yet. This isn’t the bubble bursting, this is the pinprick.

  20. bob commented on Sep 26

    So what is the burst? In Massachussets, home prices fell by 6.1% in August:

    Att here 3% inflation and you get 9% y/y decline. I don’t think it will get any faster, but if you lose 9% per year for 3-5 years, it will hurt a lot.

    Btw, the coming recession will not be short. It will take several years to work out the excess prices.

  21. T commented on Sep 26


    Given that real estate lacks a short market, a median decline of even 5% in a number of markets is very serious as it means sellers had homes out there for a while and eventually chose to sell at a lower than expected price. Usually, you’ll just see prices stall and inventories build in a weak market, as sellers can just choose to wait. By the time you see actual capitulation on the sales numbers things have gotten pretty bad — sellers are taking a cut rather than holding on to the option value and waiting.

    All of this is also why the true volatility of home values is much greater than median sales prices would indicate — the reality is that the liquidity of the asset changes wildly over time, while clearing price is sticky because you can’t short.

    A 9% drop on a homeowner with 30% equity ownership is essentially a 30% reduction in their wealth associated with their house.

    You’re only going to see 50% retractions in equity value a region where something catastrophic has happened and people are forced to sell (i.e. a company town where the only factory has closed.) Otherwise, most people will choose to not “recognize” the loss and will just keep making payments unless their ARM adjusts or their paycheck declines.

  22. Leisa commented on Sep 26

    From the Richmond Fed re the mfg index. We do manufacture cigarettes……”Each month, the Manufacturing Survey is sent electronically or by mail to about 220 contacts whose firm type, firm size and location collectively match the profile of overall manufacturing in the District. In a typical month, approximately 100 contacts respond to the survey. Respondents provide information on current activity, including shipments, new orders, order backlogs, and inventories. In addition, manufacturers inform us about employment conditions, prices and their expectations of business activity for the next 6 months. ”

  23. Bud Hovell commented on Sep 27

    Hmmm … looks like the Left Coast hasn’t yet gotten the memo.

  24. Paul commented on Sep 27

    Well, I for one live in Mass, and I hope prices come down quite a bit more, so I can possibly afford something.

  25. Mateu commented on Sep 27

    This is the second time I have seen numbers where the West Coast appeared to be surviving the bubble pop. But I have yet to see a single media source mention it. I suspect our collapse will only be late, not avoided. But I would rather understand it.

    Re: Barry’s comments about Lerah, the USA Today article ends w/ some gems. “To bring buyers back into the market, sellers simply have to lower their prices,” said David Lereah, the NAR’s chief economist.

    Glad to know that’s all it will take.


  26. eli commented on Sep 27


    The West hasn’t survived a thing. The median and avg sales prices stayed flat (.3% .5%).. but the volume of actual sales dropped 21%.

    The actual amount of money spent on existing homes last August was $61.957 billion dollars. This August it is projected to be $48.863 billion dollars. That’s a 21% decrease.

    The fact that sellers refuse to drop the sales prices of properties suggests a big disconnect to come. People are probably leveraged out the yamyam and don’t want to drop their prices.. soon.. they’ll be forced to. I can imagine a cheesy movie line of sellers being told, “Don’t you get it? You’re already dead.”

    It will be ugly.

  27. gg commented on Oct 1

    $2 trillion in A.R.M.’s are scheduled to reset from beginning of 2006 to the end of 2008. ….. if the mortgages adjust upward by an average of 2.5% , the interest payments would be $50B higher in 2009 than they are today……. not much in a $13 trillion economy, but

  28. Jim Meader commented on Oct 4

    In any given market, in any given year, 1-3% of the homes are sold in that market. Taking the maxium, for the past 10 years, and you have a 30% market turnover. Which means that 70% of the market still has the Potential Equity build up over the same 10 years. From that 70% take away at least 50% who have refianced and or otherwised consumed their equity gains. The leaves you with 35% of the total US housing market having 100% of the past 10 years gains. These home owners have massive real equity, even if current prices are down 10%. The purchacing power of this consumer group is well distributed across the US, and population base. Keep an eye on them, for what they do with thier money will “Make the Market” be it real estate, cars or other consumer spending.

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