November 28, 2006

Existing Home Prices Fall Nationally (And In The West)

While it's the local housing market that you really need to "plug in" to, it's worth keeping an eye on the broader market trends as well.

The National Association of Realtors said Tuesday that [U.S.] existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million last month. It was the first increase after seven consecutive monthly declines.

However, the median price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record.

It marked the third straight month that median prices have fallen compared with the same period a year ago, the longest stretch of such declines on record. The median is the point where half the homes sold for more and half for less.

David Lereah, chief economist for the Realtors, said he expected home prices to continue falling for the rest of the year as sellers, accustomed to the booming market conditions of previous years, reluctantly cut their prices.

"Many buyers remain on the sidelines," Lereah said. "After a period of price adjustment, we'll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007."

It's also worth noting that U.S. housing inventory is up 34.4% as compared to October 2005 which puts “months of available supply” at 7.4 (up 51% year over year).

And we have to wonder, will falling home prices actually buoy buyer confidence? While a downward price trend might aid in affordability, we can’t imagine it will inspire too much near-term confidence in terms of housing as an “investment.”

Existing Home Sales Rise, Prices Fall [SFGate]
Existing Home Sales Rise in October, Market Stabilizing [realtor.org]

First Published: November 28, 2006 12:25 PM

Comments from "Plugged In" Readers

"After a period of price adjustment, we'll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007."

Lereah is wrong - 2007 will be the true reckoning, in my opinion. A lot of adjustable mortgages start adjusting in '07, which will put more inventory on the market and additional pressure on prices for those who can't refi out or handle the bigger payments. Not to mention all the potential sellers/flippers who are currently hiding in fantasy land thinking they'll get those wishing prices if they relist in spring.

Will hopefully create a huge inventory glut and nudge the market into the 20-25% price declines we need to restore wage/price equilibrium in most of the previously "hot" markets, including San Francisco.

Posted by: Dude at November 28, 2006 2:05 PM

I predict spring will see a dead cat bounce as many buyers waiting for ANY drop in prices come into the market.

I agree that the over $1 Trillion of ARM resets will put more inventory on the market and push prices down again.

I think the bounce will happen because homeowners will use the 4 months between the first letter from the bank and the actual foreclosure to try and sell. This will push the rise in inventory due to foreclosures into the summer months.

Posted by: badlydrawnbear at November 28, 2006 3:08 PM

Hadn't thought about that, but it makes sense. And foreclosures in Cali are already dramatically rising.

Posted by: Dude at November 28, 2006 4:29 PM

Nah, foreclosures by themselves aren't enough to make much of a dent in the market. That just adds some more sellers. The lenders can just keep adding more buyers by relaxing lending standards even further. I realize that there are new guidelines for banks, but banks aren't the only source of capital any longer.

The bigger issue is whether the investors will lose their nerve. *If* that happens, the demand will start to dry up as the supply increases and then watch out.

Will it happen? The world is awash in capital right now, and that capital is looking for a return. There haven't been many opportunities for that capital to earn a return. But that is changing as corporations start to make investments: the big three auto makers probably need 60-100 Billon, and that's just three companies. As opportunities outside of housing arise, will investors continue to throw money at stupid, irresponsible people (aka sub prime borrowers)? If not, demand dries up as supply increases. And with all the merger activity, again due to the cheap and plentiful money, people are going to start losing their jobs.

How will it unfold? Who knows? Housing might survive just fine or it might collapse. I think the Fed is going to try to keep a collapse from happening too drastically. Whether the all powerful fed can really do it is another question.

Posted by: tipster at November 28, 2006 9:09 PM

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