Nov 29,2006
By Bonddad
bonddad@prodigy.net
U.S. previously owned home sales unexpectedly rose in October for the first time in eight months as lower prices and borrowing costs brought more buyers into the market.
Purchases increased 0.5 percent during the month to an annual rate of 6.24 million, the National Association of Realtors said today in Washington. The median selling price fell 3.5 percent from October 2005, the biggest year-over-year decline on record.
Falling borrowing rates and declining home prices may help cushion the housing market after a yearlong slump. The Federal Reserve has held its key rate steady for the past three months as it seeks to engineer a soft landing for the economy.
This message from this information is clear: sellers are lowering their prices to attract buyers. Notice the year-over-year price decline is the largest on record. That indicates this is probably more than mere price negotiations. It’s closer to an actual fire sale. The increase in purchases comes at the end of eight straight months of declines. This means the downtrend in sales is still firmly intact. We’ll need at least two more months of information to see if the housing market has actually stabilized. Additionally, the increase in sales isn’t that large. An increase in the 3% -4% range (or higher) would indicate the downward trend is probably closer to reversing. A .5% increase can easily be erased by a revision in next months numbers.
More importantly, even though sales increased because of lower prices,
The number of homes for sale rose 1.9 percent from September to 3.854 million. That represented a 7.4 months' supply, the highest since April 1993.
Prices didn’t decrease enough to lower inventory. In fact, despite price cuts, inventory increased to an incredibly high level. The sheer volume of homes on the market should cause concern for anybody watching the real estate market. Simply put, there are a ton of existing homes available for sale. And prices aren’t low enough yet to clear the market. Simple supply and demand dictates prices will have to drop more in order to clear the inventory off the market.
New Home Sales Dropped Again Last Month:
Sales of new homes in the U.S. fell in October, dashing expectations that the worst of the housing slump is over.
Purchases declined 3.2 percent to an annual pace of 1.004 million last month from a 1.037 million rate in September that was lower than previously reported, the Commerce Department said today in Washington. The supply of unsold homes at the current sales pace rose to 7 months' worth.
Profits are falling at builders such as D.R. Horton Inc. as sales slide and inventories swell. The decline in new-home sales contrasts with an unexpected increase in purchases of existing homes reported yesterday, and it bears out Federal Reserve Chairman Ben S. Bernanke's forecast that housing will remain a drag on economic growth into next year.
``The housing market is far from the bottom, not with the incredibly high inventory of unsold homes,'' Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, said before the report. ``The Fed is worried that a badly faltering housing market could overturn the economic cart, but as of now that has not happened.''
The median price of a new home rose 1.9 percent to $248,500 in October from $243,900 a year earlier, today's report showed.
The number of homes for sale fell to a seasonally adjusted 558,000 during the month, the lowest since March, from 562,000 the prior month. The supply of homes at the current sales rate rose from 6.7 months' worth in September.
This report has a lot of bad news. First, sales dropped, indicating a continuing drop in demand. More importantly – even though inventory increased, new home prices also increase. This indicates a price correction to clear the excess inventory off the markets hasn’t taken hold in the market yet. In other words, we still have a long way to go before we hit the bottom in housing.
Regarding the high inventory levels, builders are doing everything they can to slow the inventory increase. From the Census Bureau:
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,486,000. This is 14.6% below the revised September figure and is 27.4% below the October 2005 rate of 2,046,000.
Single Family Housing starts in October were at a ate of 1,177,000; this is 15.9% below the September figures of 1,400,000.
The number of housing starts has been decreasing pretty consistently from a high of 2,132,000 in February. However, it’s important to remember the housing market is far more illiquid than say the stock market. It simply takes more time for the real estate market to adjust.
Basically little has really changed in the housing market. Sales are still trying to find a bottom. As sales drop, the amount of inventory on the market is still at high levels relative to demand,, indicating prices of both new and existing homes still have to come down to clear the market. While there has been some downward price movement in existing homes, it is clearly not enough to clear the market. And prices of new homes have to start to come down to clear excess inventory. While builders have continually decreased their construction rate, it’s important to remember the delay time between a slowing down of new home construction and inventory hitting the market.
The correction is far from over.
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