The Latest Home Sales Data - Builders Slashing Prices

The beat goes on; as I've written many times (housing bust blog entries) this housing bust that "will all be fine within 2 quarters" as public officials assure us, is just getting started. At the heart of it all (and lost in the subprime mess) is simple unaffordability. Average Americans with average jobs cannot buy homes with reasonable mortgages (read: not exotic) in major urban areas of this country. Mortgage costs have gotten out of whack in relation to rents. This is the main problem, not what mortgages should of been given out to people who never could afford a home in the first place. When an accountant/teacher/police officer type, married couple has to make a $4500 home mortgage payment its just not reasonable. Not for most of us anyhow. So prices need to come down to a point where if you put even 5% down you can afford a reasonable payment, meaning $1500-$2500 type for "most" people.

As CBSMarketwatch reports the first stages of what needs to happen are finally being forced onto the marketplace - that is builders slashing prices to move inventory. Median prices are staying stubbornly high because (as yet) most people are unwilling to face market realities. Hence inventory is building as people think they should at least get what they paid for in an overheated market of 2005/2006. Unlike liquid markets such as equities, the housing market is quite illiquid so this dislocation in pricing can remain for a long time. But what will instigate the eventual correction in pricing will not be homeowners but builders. Why would someone buy a pre-owned home for $100K more than the home a neighborhood over brand new (assuming homes are similar of course). Answer - they won't - and that's what's going to get these prices down, and inventory eventually moving. But it's going to take time for us to get through the 'denial' stage.

• Builders slashed prices at the fastest pace in 26 years in October, boosting sales of new homes from a much lower level of September sales than was originally reported, according to Commerce Department data released Thursday.
• Sales rose 1.7% to a seasonally adjusted annual rate of 728,000 (until it's revised next month) last month from a revised 716,000 in September, which was a 11-year low.
• September's sales pace had originally been reported as 770,000. August's sales were also revised sharply lower to 717,000, down from 735,000 estimated a month ago and from 795,000 estimated in the first release. (oops did we misreport September by a factor of 54,000 homes? Oopsie! Hate when that happens) (with that sort of accuracy I am sure October's numbers are rock solid!)
• "The outlook for sales looks bleak, to put it mildly," wrote Richard Moody, chief economist for Mission Residential. The figures do not include cancellations, and some national builders have reported cancellation rates of around 50%. (oops, those darn cancellations... always accurate to report sales numbers without cancellations)
• "With tightening in credit conditions and substantial inventory levels, we are farther away from a recovery rather than closer," wrote Young Kim, an analyst for Stone & McCarthy Research. (that's not what the National Association of Realtors chief economist said, and really who knows better than him?)
• The large revisions highlight the low confidence that government statisticians have in the monthly report. The standard error in October was plus or minus 11%. (hold on while I clean up the water that just spit out of my nose - maybe these guys should go work for the Bureau of Labor Statistics, which is prone to the same 'accuracy' and 'truth in reporting')
• Sales are down 23.5% in the past year -- a vivid reflection of the carnage in the home-building industry.
• Meanwhile, the September-to-October median sales price fell 8.6% to $217,800 -- the biggest monthly price drop in 26 years. Median sales prices are down 13% in the past year, marking the biggest year-over-year decline in 37 years. (finally, we begin the process) The average sales price, by contrast, is down just 0.3% in the past year, illustrating how sales of homes with higher price points have held up. (ahh, 2 Americas)
  
• Indeed, the number of homes selling for $200,000 to $300,000 dropped by 37% last month, while the number of homes selling for less than $200,000 rose by 37%. The number of homes selling for more than $300,000 rose by 10%. (go figure, affordable housing actually drives sales - interesting concept)
• The Commerce Department said the inventory of unsold homes fell 6.7% to 516,000, representing an 8.5-month supply. The inventory peaked at 9.3 months in August. (good sign!)
• Builders have cut back production of new homes by 23% from a year ago, but the number of completed homes that have yet to be sold rose again in October to 191,000, more than twice as many as in 2004 when sales were booming.
• On Wednesday, the National Association of Realtors said the inventory of existing homes for sale rose to 22-year high, despite a record decline in the median sales price. (not so good sign!)
• In another report released Thursday, the Labor Department said continuing claims for unemployment benefits rose to two-year high, while first-time claims climbed to the highest level since February, further indications of a weakening labor market. (rut roh! Well at least the market is rallying!)

Well seeing that the median price in America is finally falling, I will move this correction up from top of the first inning to the bottom of the first. The problem is since we choose to regulate only after carnage (free markets rule, until we need to bail people out) - the free market will overshoot from one end (have a heartbeat? get a loan!) to the other extreme. So what do we have to look forward to?

• credit being harder to get than it should as lenders get even more risk averse than they should be (gun shy)
• slowing US economy due to potential recession
• unemployment rising
• still unaffordable housing in most major urban centers
• many owners of 2005/2006/2007 vintage being upside down on their homes (a bit tougher of a proposition than being upside down on a car)
• inflation eating away at budget so even less discretionary income for small things like... mortgages

But once we work through this whole situation, by say 3-4 months from now according to public officials, we should be ready to go back to party mode right around... April Fools.

As an aside I've been reading a series of articles in the local friendly (Detroit News: The Foreclosure Factory), about the joke it is to become a mortgage lender in Michigan - do you realize you need a license to cut hair but not sell $500K mortgages? Anyone can put a shingle out. Anyone. Luckily free market forces will fix all this - by 2011. Because as you all know - all regulation is evil, it makes no sense to ever be proactive instead of reactive. Preventing a problem with simple, common sense agreed upon approaches by reasonable people would never work. Let's fix it after it impairs huge swaths of the economy and destroys many individuals. Party on....