Home Sales: Update

Now that I’ve taken to reporting this kind of stuff to you: pending home sales plunged last month. Here’s the MarketWatch story:
July pending home sales index falls 12.2%, Realtors report

Pending sales are those where a contract has been signed but not completed: the “closing” hasn’t taken place. The only way to read this statistic is that the real estate market is in turmoil and is no where near finding a stable footing. That means many more months of instability, falling prices and ultimately a worsening in consumer confidence.

I have said it before, but it’s worth repeating: real estate by itself cannot push the economy into recession, but its “knock on effects” can. Home construction was a huge factor in overall growth these past few years, and along with new construction comes durable goods sales [this is a part of consumer spending aimed at things like refrigerators, ovens and so on that people install in a new home]. So as long as home sales fall durable goods spending will also fall.

But the really big effect will come from the malaise rippling through the economy as more and more people find that they cannot sell their homes at the prices they initially want. Some will postpone moving, if they can, others will take a loss, and still others may lose their home as they cannot afford to re-up their adjustable rate mortgages. The combination of these effects is what Wall Street fails to grasp because they are medium to long term in developing and Wall Street is relentlessly short term in its focus. Hence the volatility when the Street gets a report that suggests housing has not yet bottomed out: last month’s data had a mild uptick in sales and the Street immediately thought the worst was over. Today’s news, coupled with other indices, shows that we are far from the bottom. The only issues at the moment is whether these knock on effects will be strong enough to slow consumer spending sufficiently to push us into recession. The odds are increasing. Look for a slowdown in early 2008.

Save your pennies and invest in housing next year or the year after. This ride is no where near over.