When writing this column, I usually do so from home and have MSNBC on for background chatter, just like I’m doing now. And until five minutes ago, this column was virtually complete. Then, the ominous lead-in music for “Breaking News” echoed through the house. What could it be? In this economic climate, almost anything. Flashing boldly across the screen, “July Home Sales Plunge to Record Low.”
I had planned to discuss the thought provoking and controversial topic of a pending housing shortage, but for now, you’ll have to settle for that tease. Given the seriousness of the July housing numbers, I thought it a good opportunity to discuss the meaning and potential impact this may have on the economy in the months ahead.
Despite record low interest rates (current rates average 4.50% or less for most 30 year fixed rate mortgages), ample inventory, and falling prices, sales of existing homes plunged by a record 27% in July. Can’t we get a break already? This represented the biggest monthly drop since recordkeeping began in 1968.
The National Association of Realtors (NAR) also announced that sales of previously owned homes fell to a seasonally adjusted annual rate of 3.83 million. This surprised even the most pessimistic economists, who had expected the number to come in the range of 4.5 to 4.7 million, as polled by Thomas Reuters. Previously owned homes represent approximately 90% of the total market.
On top of that, June’s sales figures were revised downward to 5.26 million, from a previously reported 5.37 million. The pace of existing home sales is now the slowest since record-keeping began in 1999.
As sales have slowed, the inventory of total unsold homes rose 2.5% to just under 4 million in July. At the current sales pace, it would take 12½ months to sell those homes, the highest level since 1999. In June, it stood at 8.9 months. The supply of single-family homes stands slightly lower at 11.9 months, the highest since 1983.
Foreclosures and short sales continue to have a major impact on the market. The sale of foreclosed homes accounted for 22% of the total homes sold in July, while short sales (where banks agree to sell a home for less than what is owed on it), represented another 10%. This means that nearly one out of every three homes sold in this country were either a foreclosure or a short sale. Those numbers are unprecedented.
While much of the media attention has focused on the housing crisis being a regional discussion, sales last month fell in all four regions of the country. Worst hit was the Midwest, with a dramatic 35% drop, followed by our own Northeast at 30%, with 25% in the West and 23% in the South.
The end of the First-time Homebuyers Tax Credit is being credited as the likely culprit for the fall these last few months. Scheduled to end on April 30th, buyers could still qualify as long as their purchase closed by June 30th. An example of its impact is in the Midwest, where homes selling in the range of $100,000 to $250,000 saw a staggering drop of 47%. This price range is most likely to include first-time buyers.
Purchases will be “soft for at least two more months, as the housing market works through the effects of the end of the tax credit,” said Lawrence Yun, Chief Economist for the NAR.
As I listened to the report and grimaced in dismay, it immediately reminded me of the notion I addressed in my last column about the likelihood of a double-dip (or w-shaped) recession. If you didn’t read that column, or haven’t heard of it by now, you’ll likely be sick of hearing about it by the end of the year.
In case you missed it, a double-dip recession is characterized by a period of sharp economic downturn, followed by a short period of growth, likely just a few months, only to rather quickly fall back into recession, before eventually reaching full recovery.
The weakness now follows a relatively strong spring. Unemployment had started to drop, while job growth, consumer spending and confidence were all turning positive. But with unemployment remaining stubbornly high and pricing showing signs of worsening again (median sale price in July was $182,600, down .2% to from June), it’s now becoming increasingly inevitable that a double-dip is a likely reality.
After the announcement of July’s housing numbers, many argue it already is one. In a span of just two weeks, from one issue here to the next, what seemed like only a possibility now seems a virtual given.
For buyers and sellers in the midst of this, remember the adage…patience (mixed with a dose of reality) is a virtue.
Chris is a regular contributor to Letters from CAMP Rehoboth and can be reached at email@example.com.