Tuesday, November 25, 2008

We're Nowhere Near a Bottom in Housing

From Reuters

Sales of previously owned U.S. homes fell in October, with the median home price notching its biggest drop on record as tough economic conditions kept buyers on the sidelines, data showed on Monday.

From Marketwatwch:

Home prices in 20 major U.S. cities dropped 1.8% in September from the prior month, and had fallen a record 17.4% from the previous year, according to the Case-Shiller home price index published Tuesday by Standard & Poor's. Prices have fallen in all 20 cities compared with last month and a year ago.

The price data is all I need to know. When prices fall that much it indicates the balance between supply and demand is horribly out of whack. In addition, prices don't fall that much at the end of a long-term price decline. They fall that much in the middle of a price decline.

The inventory of existing homes for sale slipped 0.9 percent to 4.23 million from 4.27 million in September. The median national home price declined 11.3 percent from a year ago to $183,300, the lowest since March 2004, the NAR said.

However, the percentage drop in prices was the biggest since the NAR started keeping records in 1968. Distressed sales are accounting for about 45 percent of existing home sales.

Analysts said even though housing had become more affordable, sales were likely to remain depressed because of tight access to credit and mounting job losses.

While the drop in inventory is good news, notice that from an absolute numbers perspective the amount of homes available for sale is still sky-high (h/t Calculated Risk):

Click for a larger image

And as the article points out, job losses are really hurting sales figures. The most recent jobs report from the BLS indicates job losses are accelerating. As a result, personal durable goods purchases are decreasing (from the latest GDP report):

Real personal consumption expenditures decreased 3.1 percent in the third quarter, in contrast to an increase of 1.2 percent in the second. Durable goods decreased 14.1 percent, compared with a decrease of 2.8 percent.

And then there are the credit markets which are clearly hurting the real estate market. The Federal Reserve's most recent survey of lenders noted:

Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 70 percent of domestic respondents—down from about 75 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.2 Responses differed somewhat by bank size, with about 80 percent of the largest banks, but only 55 percent of the smaller banks, reporting tighter standards for prime borrowers. About 90 percent—up slightly from July—of the 29 banks that originated nontraditional residential mortgage loans reported having tightened their lending standards on such loans.3 All 4 of the banks that responded to the survey’s question about lending standards on subprime loans indicated that they had tightened their lending standards on such loans over the past three months.4 About 50 percent of domestic respondents—a somewhat higher fraction than the roughly 30 percent in the July survey—experienced weaker demand, on net, for prime residential mortgage loans over the past three months. A higher net fraction of large banks than smaller banks reported a decline in demand. About 70 percent of respondents—up from roughly 45 percent in the July survey—indicated weaker demand for nontraditional mortgage loans over the same period. Each of the 4 domestic banks that originated subprime mortgage loans reported weaker demand for such loans over the survey period, compared with 4 of the 7 banks that reported originating subprime loans in the July survey.

Simply put, demand is down from a weakening job market and tighter lending standards. Supply is still high because of the increasing foreclosure situation. Decreased demand + high supply = lower price. It's that simple.