Saturday, October 28, 2006

Sales Up, Prices Down

"A barrel of economic news concerning housing hit this week, and none of it points to market decline coming to an end soon. True, new-home sales were up, but that gain came at the expense of prices, which took their biggest tumble in 36 years. Existing-home sales fell for a sixth straight month, and existing-home prices posted back-to-back monthly declines for the first time in 16 years.

But the bad economic news does have a bright side. There is now such worry about housing and what it might mean for overall economic growth that the Federal Reserve was inclined to leave interest rates unchanged for a third consecutive meeting. And that thinking has had a positive effect on long-term mortgage rates, which have remained low by historical standards even as housing declined."

Full article...


Anonymous Mr. Rant said...

Real Estate: The Big Question

By Terry Savage Contributor
10/29/2006 7:47 AM EST
Click here for more stories by Terry Savage

Is it time to buy? That's a question I'm frequently asked. But usually it's about the stock market. Lately, though, it's a question that's asked about real estate. Whether it's a house, a condo or a second home, people are starting to take a second look at the real estate market. That's probably because the latest statistics are making headlines.

September sales of existing homes were 6.16 million, down from 6.3 million in August -- and from 7.2 million in September 2005.

The inventory of unsold homes was 7.3 million units in September, up from 4.6 million homes listed for sale in the same month a year ago. (And there may be many more sellers waiting in the wings, planning to list their home when the market "recovers.")

Prices are falling, too. The National Association of Realtors reported the biggest drop in home prices since it began tracking the data in 1968. The median sales price was $220,000 in September, down 2.2%, following a 2.2% decline in August. These two drops are the first time median home prices have fallen since 1995.

The story is similar for new-home sales, which have picked up slightly -- a 5.3% increase over August -- as a result of price cuts and incentives offered by builders. In September, the median price of a new home dropped 9.7% compared with September 2005. The median new home price fell to $217,100, the largest year-over-year decline since December 1970.

So, is it time to buy? The smart money says it's time to buy when everyone wants to sell, or as they put it on Wall Street, when blood is running in the streets. That's the secret of making the best of a bear market.

But the housing market is different from the stock market.

Declines in stock prices are far more visible -- and universal -- during a bear market. Stocks are "fungible." That is, 100 shares of Cisco (CSCO - news - Cramer's Take) or Sun Microsystems (SUNW - news - Cramer's Take) are like any other 100 shares of those stocks.

But all houses -- even ones built in the same neighborhood, by the same builder -- are slightly different. A two-bedroom condo might have better appliances or a more appealing d├ęcor than the same type of unit in the same building. So it's hard to make price comparisons in housing, even with the existence of monthly median statistics.

And there's another big component in the real estate market: visibility. Sale prices aren't published for weeks, until a deal closes. So it takes longer for a declining real estate market to be analyzed and to run its course. Meanwhile, changes in the well-known stock indices are tracked instantly and compared on a day-by-day basis. As a consequence, emotional trends tend to gain momentum more quickly in the stock market.

A generation of investors was scared out of the stock market by the 2000 crash and subsequent bear market. Many came to view real estate as the correct alternative for creating wealth. Now the differences in the two types of investments will become apparent. After all, the Dow has made new highs in a relatively short time period of time. It's unlikely that real estate will make a similarly timely rebound from its eventual low.

Stock market technicians watch charts and volume to predict market turns. But just as the Dow has traded differently from the Nasdaq, some sectors of the real estate market have moved to greater extremes. As in the Nasdaq, with speculators in the market in places like Las Vegas, California and Florida, the price swings should be wider.

And you have to wonder if all the bad news is already figured into this real estate market. After all, these are relatively good times: unemployment is low, interest rates remain low and the economy is still strong.

Yet in the coming months, an estimated $1 trillion in adjustable-rate mortgages will be reset. Even at current low rates, monthly payments will jump for those who entered the market with low "teaser" rates. And those who have an "interest only" mortgage could see their monthly payments rise by 50%.

Even if the economy holds course, those mortgage resets could force a lot of people to sell their homes -- or default on their payments.

In fact, the foreclosure rate has been rising sharply in many areas of the U.S. It's been predicted that more than 1.2 million homeowners could face foreclosure this year. When you see television news stories about middle-class families being evicted, you'll know this trend has peaked.

In short, without some extremely and unexpectedly good economic news -- or a quick resurgence of inflation -- the housing market has little reason to turn around, and buyers have little reason to push prices higher.

It's a classic case of reality entering a market that has been moved to extremes by emotion. If you're a buyer, you can sit back and pick your spot -- unless, of course, you have a home to sell first! And that's The Savage Truth.

Monday, October 30, 2006 7:14:00 PM  
Anonymous Anonymous said...

Mr rant,
Excellent post- thank you

Thursday, November 02, 2006 11:23:00 PM  

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