Wednesday, August 27, 2008

We're Nowhere Near A Bottom in Housing

From the WSJ:

But prices are still much lower than they were a year ago. Home prices in 10 major metropolitan areas in June fell 17% from the year before, though the declines appear to be moderating. The broader 20-city index showed similar patterns. A separate gauge of home prices by the Office of Federal Housing Enterprise Oversight, which covers more of the country but only tracks mortgages backed by Fannie Mae and Freddie Mac, found home prices were unchanged in June from the month before.


Sales of new homes rose by 2.4% in July to a seasonally adjusted annual rate of 515,000 units after falling to a revised, 17-year low in June, the Commerce Department said Tuesday. The inventory of unsold homes declined for the second month in a row, to 10.1 months' supply at the current sales pace. Still, the number of unsold homes remains at historically high levels.

"There's still a big overhang of homes on the market that need to clear," said Lehman Brothers economist Michelle Meyer.


On Monday, the National Association of Realtors reported that there was an 11.2 months' supply of previously-owned homes for sale last month, compared to about a six-month supply that usually accompanies healthy housing markets. Sales of previously-owned homes make up about 85% of the market and have been hampered by a flood of foreclosed properties that's expected to continue through next year.

Let's take this in pieces.

First, year over year prices are dropping big. In fact, this is the largest year over year drop on record. The good news is prices are in fact dropping. For a long time, home prices were very sticky, meaning they were not moving in reaction to a market that was clearly in need of lower prices. Now prices are moving lower. But once prices start moving lower, there is no way to stop them from dropping until they hit the market clearing price. The rate of the drop indicates we're nowhere near a bottom yet. When we start to see a slowdown in the rate of year over year change, then we'll know a bottom is approaching.

Regarding existing homes, note the following:

The median national home price declined 7.1 percent from a year ago to $212,400 and the inventory of homes for sale rose to 4.67 million which would take 11.2 months to clear at the current sales pace. That matched a record set in April.

Although prices are dropping, inventory is still climbing to record levels. That means we're nowhere near the market clearing price. Therefore, the existing home market is still headed lower for the foreseeable future.

Regarding new homes, the good news is that inventory has been dropping for over a year now. However, the months of supply at current sales rates is still near historically high levels, indicating we have a ways to go on the possible bottom there as well.

And this is before we get into the whole banking thing (which we'll look at in the next post).