2006 September 25 Monday
US Housing Prices Fall First Time In 11 Years

The housing bubble that replaced the dot com bubble is popping too.

Prices of existing homes fell for the first time in 11 years and the backlog of available homes for sale was at its highest since current measures began, underlining the significant slowdown in the housing market.

Existing-home sales slipped 0.5 per cent to an annual rate of 6.30m units in August from a level of 6.33m July, according to the National Association of Realtors. They were 12.6 per cent down on the year before

A large supply of houses on the market make additional price cuts likely.

Washington Prices of existing houses in the U.S. fell last month for the first time in 11 years as sales declined to the lowest level since early 2004. Despite the August decline, the National Association of Realtors still expects housing prices to rise slightly this year.

The median price of a previously owned house dropped 1.7 percent in August from the same month last year, the National Association of Realtors said Monday. Purchases dropped 0.5 percent to an annual rate of 6.3 million.

Sellers may have to keep lowering prices after the supply of houses on the market jumped to the highest in more than 13 years.

There's a half-empty, half-full aspect of the housing market at this point.

First, although existing-home sales have fallen more than 10% since last year, they remain comfortably above 2003 levels. And in the long-term context of the data series, the figures represent only a correction to the overall upward trend. This fact, however, is a double-edged sword: You could conclude that the housing market is still healthy because it's still at relatively high levels, but you could also conclude that the housing market has a lot further to fall if the economy falters significantly. Similarly, although median resale prices have reached a plateau over the past year and may be starting to fall, they remain fully 25% higher than they were in 2003 -- not the triple-digit growth that some areas of the country have come to take for granted, but a reasonable return on investment, nevertheless.

Rising inventories, on the other hand, are more unusual. The current backlog of inventory on the market, representing about seven months of sales activity, represents the highest level of inventory since the mid-1990s. In the context of regular businesses that produce goods, high levels of inventory generally indicate falling demand, which can cause sharp reductions in cash flow for a given business, threatening its ongoing operations and often requiring substantial shifts in business strategy in order to survive.

The supply of homes for sale is the largest in 13 years.

The National Association of Realtors said sales fell for the fifth month in a row to an annualized rate of 6.3 million units. Sales are down 12.6 per cent from the same month in 2005.

The supply of homes for sale grew to 3.92 million, the highest number of listings in more than 13 years.

"We've been anticipating a price correction, and now it's here,'' said the realtors association's chief economist, David Lereah.

This will cut into consumer spending since people with declining home values will become more reluctant to borrow against their houses or run up other forms of debt.

Luckily energy prices are declining rapidly and that'll put more cash into people's pockets to spend on other things. The oil price decline might cancel out the effects of the housing price decline and prevent a recession.

Share |      By Randall Parker at 2006 September 25 11:23 PM  Economics Housing

RoberHume said at September 26, 2006 11:42 AM:

In his latest edition of Irrational Exuberance, published last year, Robert Schiller gives a convincing argument that the real estate bubble of the last 5 years, comparing back to 1890, is 50%. I'm not sure if that means the prices should decline by 50% or 33%.

John S Bolton said at September 26, 2006 9:27 PM:

Over how many years, and in nominal or constant dollar terms?
Considering that they've been trying to lend mortgage money to even illegal aliens, which implies very low down payments as well, what is to stop those using fake papers, from running up phoney builders' liens and running off, if they have no equity increase?

Quequeg said at September 27, 2006 3:23 PM:

A few years ago, Sir John Templeton (he's sort of like a Warren Buffet) advised that people wait for home prices to fall to 10% of their current value and then buy. Somehow, I doubt that they'll fall that far, but maybe he was just talking about the most over-priced areas. How far did Japan's real estate market fall after their bubble burst in 1990?

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