Noelle Knox
USA Today
WASHINGTON — Existing home sales posted an unexpectedly sharp drop last month to the lowest level since January 2004 and home prices fell in all regions of the country but the South, the National Association of Realtors said Wednesday.
The downward pressure on prices probably will continue through the beginning of next year because the inventory of homes for sale has surged to the highest level in 13 years. There are now 3.86 million homes for sale, a 7.3-month supply.
The weakness in the market is being driven by higher interest rates, low affordability, and speculators who are dumping investment properties back on the market because they couldn’t flip them for a profit.
“I was disappointed, it was a lot lower than I anticipated,” said David Lereah, NAR’s chief economist. “What is clear to me is sellers are more stubborn than I expected them to be. We definitely need a correction in prices in order for buyers to come back into the market.”
He said he expects home prices to come down 5% nationally, more in some markets, less in others. And a few cities in Florida and California, where home prices soared to nose-bleed heights, could have “hard landings,” he said.
Total existing home sales fell 4.1% from June to a seasonally adjusted annual rate of 6.33 million — a much steeper decline than economists expected.
The median single-family home price, meaning half cost more and half cost less, was $231,200, up 1.5% from July last year, but the median condo price fell for the second month in a row and is now $225,600, down 1%.
What is most worrying, however, is how the real estate markets are suffering in Michigan, Ohio, Indiana, Massachusetts, and some parts of Pennsylvania and New York. Job losses in those area are driving home sales down and foreclosures up.
“That’s a whole different situation for real estate, that’s a contraction,” Lereah said. “That worries me more than anything else. It highlights the need for the (Federal Reserve) to stay the course and not raise rates. The economy is a little softer than everybody thought.”
In the Northeast, sales were off 5.4%, and the median price dipped 2.1% to $276,000. Home sales in the Midwest slid 5.9%, and the median home cost $178,000, off 0.6%. And in the West, sales were lower by 6.4%, and prices slipped 0.3% to $348,000.
While home sales fell 1.2% in the South, the median price rose 3.2% to $192,000.
The July report was weaker than analysts expected. Economists were forecasting the pace of sales to fall to 6.55 million.
Wednesday’s disappointing results for existing home sales comes a day after Toll Bros., one of the nation’s largest builders of new homes said orders have dropped 48% in its most recent quarter.
“The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in confidence,” said CEO Robert I. Toll. “The speculative buyers of 2004 and 2005 are now sellers, builders that built speculative homes are trying to move them by offering large incentives and discounts, and some anxious buyers are canceling contracts for homes already being built.”
“The overhang in supply and the aggressive discounting of many builders is undermining consumer confidence and keeping buyers on the sidelines as they continue to worry about the direction of home prices,” Toll said.
And low consumer confidence equals low builder confidence. Last week, the National Association of Home Builders said that confidence among builders hit a 15-year low.
For five years, home sales had hit record highs as low mortgage rates lured buyers. But the housing sector has lost steam this year with mortgage rates rising. Would-be buyers also have grown cautious amid high energy prices and a slowing economy.
The Federal Reserve earlier this month decided to halt a rate-raising campaign that had pushed interest rates steadily higher.
The Fed’s goal is to raise rates sufficiently to thwart inflation but not enough to hurt the economy.
One of the things that Federal Reserve Board Chairman Ben Bernanke and his colleagues are watching closely is the housing slowdown. If home prices and sales were to crash, that could spell big trouble for the economy. Thus far, Bernanke has said the market’s slowdown has been fairly orderly.
The housing sector’s transition from a red-hot market to a cool one has important implications for the economy. Consumers who watched their homes rise rapidly in value over the last several years felt wealthy and more inclined to spend.
They also borrowed against their homes to support their spending.
But with home values not going up as much now as they had in the past several years, consumers have tightened their belts. That has contributed to a slowing in economic activity.