I’m an optimist. No, really. In “regular life,” I like to look at the bright side of things. Anyone who has known me for a long time will tell you the same thing.
But when it comes to the markets, I don’t mess around. Starry-eyed optimism is a recipe for disaster. You have to approach trading and investing in a cold, rational manner. I don’t care if you’re talking about bonds, stocks, real estate, or anything else.
That brings me to the housing market. Many sellers have been hoping, even betting, on a robust 2007 spring selling season. They figured that once the holidays ended and the snow receded, sales would show their typical spring surge … inventories would decline … and we’d be off to the races again.
The real estate industry did its best to paper over any worries and pooh-pooh any suggestion that we were in for a longer-lasting downturn, too.
For example, the National Association of Realtors ran an ad campaign back in the fall proclaiming, “It’s a great time to buy or sell a home.” Here’s a quote from the group’s fact sheet:
“The latest economic forecasts suggest that the real estate market correction is coming to an end, offering consumers a once-in-a-lifetime buying opportunity.”
Was there any concrete evidence to believe that was the case? Did the cold, hard facts support such a view? I didn’t think so. And the latest figures confirm what I’ve suspected would happen all along …
Home Buyers Just Didn’t
Show Up this Spring!
Just this week, we got the May data. Here’s what we learned …
Sales kept falling: New home sales dropped in May to a seasonally adjusted annual rate of 915,000 from 930,000 in April. Measured from a year ago, sales volume was off by almost 16%.
Existing home sales, for their part, dropped 0.3% to a rate of 5.99 million. That was down more than 10% from the same month a year ago, and the lowest level since June 2003.
Supply problems persisted: The number of new homes for sale dipped slightly to 536,000. But on a months supply at current sales pace basis, inventory was 7.1 months. That was up from 7 in April and 6.2 a year earlier.
Things were much, much worse in the existing home market. The supply of used homes for sale surged more than 23% from a year ago. There were 4.431 million single-family homes, condos, and co-ops on the market. That’s the most in U.S. history!
On a months supply at current sales pace basis, existing-home inventory is running at 8.9 months. That’s up from 8.4 in April, and the worst reading since June 1992.
Prices slumped: The median price of a new home fell 0.9% from a year ago to $236,100. The median price of an existing home dropped 2.1% to $223,700. A separate index compiled by S&P/Case-Shiller showed prices down in 14 out of 20 major metropolitan areas, with the biggest declines in Detroit (-9.35%), San Diego (-6.7%), and Washington D.C. (-5.7%).
As I told The Washington Post and CNNMoney.com, there just isn’t any evidence of a turnaround in these numbers. There likely won’t be a lasting rebound for some time to come, either.
You see, the nationwide supply glut in the new home market is extremely large. We have about 150,000 more new homes on the market now than at any time in the last two and a half decades.
Other indicators, like the record-high vacancy rate for U.S. homes, also suggest we have quite a few excess homes to work through before prices and home construction pick up meaningfully.
As for the existing market, 4.43 million available homes is a huge number. In fact, it’s roughly twice what was customary during the late 1990s and early 2000s. The only way we’re going to chip away at this Mount Everest-sized pile of inventory is by price cuts. And so far, sellers haven’t been aggressive enough.
What to Do In Housing Right Now
Telling it like it is doesn’t make you a lot of friends. One of my neighbors ribs me about my comments in the local press. The occasional angry e-mail finds its way to me, too. Sometimes, even I wonder if I’m being too much of a downer.
But you know what? If this is what it takes to help people make smarter financial decisions, I don’t mind being the bearer of bad news. I’ll save my optimism for the blackjack tables!
If you’re involved in the housing market, my suggestions are simple …
First, as we close out the spring selling season, please recognize that this is not the same market we had the last couple of years.
If you’re selling, price your home like you mean business. Activity and buyer traffic will be tailing off between now and the end of the year. You’ll have to do more to get noticed. And pricing below other recent comparable sales is a great way to do it.
If you’re buying, drive a hard bargain. And definitely stay away from those “Frankenstein Financing” loans — the kinds that are blowing up in the lending industry’s face.
What if you’re moving to a new area and unsure what to do? Well, why not rent for a while and let things settle down? Because if I’m right, this market isn’t going anywhere for a long while.
Until next time,
Mike
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