Thursday, September 27, 2007

More Bad News on Housing

Sept. 27 (Bloomberg) -- Sales of new homes in the U.S. dropped more than forecast in August and prices plunged by the most since 1970, underscoring the Federal Reserve's concern about the broader economy.

Purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago.

The figures suggest home construction will extend its deepest slump since 1991, and consumers will have less home equity to tap for spending. Fannie Mae Chief Executive Officer Daniel Mudd said in an interview today that the industry won't hit a bottom until the end of next year, echoing comments by KB Home, the builder that hours earlier reported a third-quarter loss.

To me the most significant item in the above release is the statement that on a national basis, the median price for a new home, on a year over year basis, was down 7.5%. I indicated in a previous Blog that I thought that next spring is when we would see the break in the seller’s asking price, perhaps it may come sooner than I thought.

The sale price of existing homes, not yet reported for August, had a decline through July of about 3.8% on a year over year basis. With the price of new homes, falling by 7.5% would could see downward pressure on the prices of existing homes. I believe there will be even more price pressure on the asking prices of existing homes, because of the decline in the offering price on new construction. Builders and developers are despertately trying to move inventory off their books. If we were to see the year over year decline for existing home values to fall in line with new home prices declines we could see a death spiral in prices, one lowers and the someone lowers and so on.

We some times forget that the American consumer spending their money accounts for two-thirds of the GDP of the United States. A lower home value has the ability to shrink the wallets of a great many Americans. If Americans sit on their collective wallets, it cannot be good for the economy.

Dan Perkins

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