Housing Implodes … Again

In a sharp confirmation of the power of government stimulus the existing housing market slumped last month. And I mean slumped. Sales of existing homes fell 27.2% to an annual rate of 3.83 million in July. That drop was the largest one month decline ever. The only thing propping up our housing market over the past few months has been the Federal tax credit for first time buyers. With that gone the market’s inner workings are truly exposed: it is still mired in deep recession.

Confirming this analysis is the fact that the median house price rose, to $182,600. This rise is due to the shift in mix of sales, with the tax credit gone thee were fewer cheaper homes sold so the average price rose even as sales slumped. Or at least that’s my explanation: first time buyers bought 38% of homes sold in July, which is the lowest percentage for a year. Interestingly, people paying all cash for a house accounted for 30% of all sales, and investors – i.e. not owner-occupiers – accounted for 19%. These two latter figures also fit the pattern of a depressed market. Credit is hard to come by so the number of mortgage backed buyers is dwindling, while the number of people speculating is increasing.

One truly odd statistic to emerge in recent weeks is the insanity that still lingers in home owner’s perceptions of value. Surveys show that in some of the most hard hit states home owners still expect to see price appreciation of 10% a year over the next decade.

We call that irrational. Some might say lunatic asylum grade.

At any rate the housing market is dormant and likely to stay that way for a while. We have a huge over-supply of single family housing and an under-supply of rental property. Such distortion will take years to unwind during which housing is an unsafe investment.

Of course I have argued for years that a home is not an investment anyway, so that statement is hardly new.

At least here.