Bad numbers on existing home sales this morning. But is the reason behind the numbers even scarier than the numbers themselves?
The numbers, mind you, were bad enough. Existing home sales fell 2.7% in August. The drop comes after four consecutive months of increasing sales. And after a jump in sales of 7.2% in July economists had expected August numbers to continue the upward trend.
So why the drop?
I’d call one explanation “So, what did you expect?” Unemployment is still marching toward 10%. Consumers are paying down debt to repair their personal balance sheets. Mortgage money looks cheap until you notice that at 5% and change, you’re paying five percentage points above the 0% cost of short-term money. Historically that’s a big and expensive spread.
So any housing recovery is going to have set backs and the trend, even if it is indeed upward, won’t be smooth.
It’s the other potential explanation that worries me. In this theory the drop in existing home sales has come because buyers know that the market is way more congested with houses for sale than it looks. A lot of potential sellers have pulled homes from the market until things get better. Banks are sitting on a big backlog of houses should be in foreclosure but that they’ve foreclosing on because they don’t want to put the defaults on their balance sheet or in the market. In this explanation buyers have pulled back because they know that prices are about to take another leg downward and they’re waiting for bigger bargains.
I tend to believe there’s something too explanation #2. If you look at the decline in the number of existing homes on the market, it’s pretty clear that buyers have pulled houses off the market. And if you look at bank financial reports in the last quarter, there is a foreclosure gap. Given the state of the economy and the bad news we’re getting from the credit card market on rising default rates, banks should have foreclosed on more houses than they have.
If I’m right and it is explanation #2, then we’re looking a tough quarter or two ahead not just for housing stocks and the housing market but for the financial sector too.
I was out walking today, I found an apple, and a pair of sox. I picked them both up. I will eat the apple, and I will wash the sox.
Think about it.. Just think about it.
Catch 22, thanks for your post. I think you’ve captured the current buyer’s quandry exactly.
dblwyo, it would help if we knew how big the shadow inventory was. But then it wouldn’t be a shadow would it.
You are absoutly correct. If the banks lost their bad “assets” their balance sheets would put them in asset / debt imbalance. We are still waiting for that shoe to drop. I thought maybe the gvt would address this but I guess it doesn’t present a way for the boys to get their hand in the cookie jar.
Don’t forget seasonality. YoY August sales were up slightly over last year. But, looking at CalculatedRisk’s charts, the market is beginning a bottoming process. Nonetheless a) we have a huge shadow inventory to be worked off and b) the economic consequences and foreclosures will likely worsen for some time to come.
I agree with Jim’s assessment. Besides, bank fees are too high. I’d be glad to refinance, but I know I’ll be nailed by the fees. So, I am trying to use banks as less as possible. Banks lost money on derivatives, now they try to make it back by squeezing the consumer.
I don’t know about the rest of the US, but here in Phoenix, the real estate market season is over. Schools in session, and no one’s going to be moving now that the kids are back in school unless they just have to.
There seemed to be a little push here at the end to drive home prices up again, but I don’t think it’s succeeded. My husband and I are watching to see if prices take another dive. From the looks of it, mortgage holders still have those crazy loans “pick your own payment” to reset. Another wave of foreclosures we’re guessing.
We’re also watching interest rates. In the meantime, we’re cramming every last dollar we can away for a house. We negotiated a lower rent so even more can go towards our goal.
Hopefully, by the time the real estate market picks back up next spring, we’re hoping we’ll be ready to buy and that prices/interest rates will still be good.
As for the way the country is headed, yikes! Should we even bother with a mortgage?
My wife and I have been toying with the idea of moving up in housing for a couple of years. We can certainly afford it and have outgrown our current place. Absent the economic blow-out of the last 2 years, we would have done so.
I can’t help but wonder if many people in our shoes are at idle for similar reasons.
We are good candidates and fit the mold of many growing families with relatively good job security, credit, income and savings. But, there are too many uncertainties in the near future to justify taking on additional expenditures.
I just don’t have enough confidence in what the government is going to be doing that will impact me economically to take on additional debt. At least not to the extent that the not yet attractive real estate prices make taking the risk compelling.
At some point we may just say, “That’s too good of a deal to wait any longer.” But, we haven’t seen the kind of drop in “move-up” housing to outweigh our other concerns. And based on the 24 month supply of our target housing price, sellers haven’t come to terms with their own value assesments.
We want to see more clarity from governmental policies or prices to reflect the glut of inventory. Otherwise, it’s too comfortable to live with a large cushion, well within our means.
We’ve had a crisis of confidence in government to go along with the economic crisis. And neither look to be offering any clarity. We heard business leaders saying this at the depths of the recession and how it paralyzed planning. Well, responsible people react that way in their personal lives as well.