Housing Markets See a Slowdown in Sales and an Uptick in Inventory
No surprise, take away the government stimulus and home sales start falling to something more normal for this kind of economy. The AP reported July 22, 2010 that June home sales “fell 5.1 percent to a seasonally adjusted annual rate of 5.37 million” due largely to the recent expiration of the federal home purchase tax credit. Homeowners in escrow by April 30, 2010 can still take advantage of the credit as long as they close by September 30, 2010, but it is no longer available to new purchasers. The number of unsold homes on the market has increased “2.5 percent to nearly 4 million”, which is about a “nine-month supply at the current sales pace, the highest level since August”. A “healthy” level of inventory is about six months. I would guess that inventory will continue to climb until home prices begin to relent and resume their downward slide.
Shadow Inventory to Weigh on Home Prices
Also likely to weigh on home prices is the amount of inventory already on the banks’ books or in the foreclosure pipeline, something I’ve written about before based on an article that appeared in the Wall Street Journal. There is so much foreclosure and preforeclosure inventory out there that, at the current rate of sales, it will take 8 1/2 years for the banks to clear. Clearly banks can’t hang on to this inventory forever. Once banks begin dumping properties, prices will act accordingly.
Mortgage Rates at Record Lows
The one bright spot in the housing market – at least for those in a position to take advantage of it – is the incredibly low mortgage interest rates. If you are in a stable housing market (one that didn’t go crazy during the bubble and likely won’t drop significantly even as the recession grinds on) and are looking to purchase, now couldn’t be a better time. The average rate for a 30-year fixed loan, according to the AP, was 4.56% this week – the lowest since Freddie Mac began tracking rates since 1971. Low rates like that translate into significantly greater affordability and value for prospective homebuyers.
Fiscal and Monetary Stimulus Has Its Limits
The low rates combined with the fact that home prices continue to fall demonstrates that fiscal and monetary stimulus has its limits. The federal government has been working overtime trying to pump money into the economy to stimulate business activity and prop up the housing markets, but it is quite apparent that even it has limited power to push banks to lend, consumers to borrow, and home prices to stabilize or increase. What the economy needs is a readjustment, a clearing of the bad debts and misallocated resources accumulated during the housing bubble. If homes are not affordable, we should not be trying to support prices at these levels. If consumers and businesses are already heavily indebted (and they are), we should not be trying to get them to borrow more. And if the federal government is already heavily in debt, we shouldn’t be attempting the aforementioned futile exercises with even more borrowed money.
-CH
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