Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, according to the National Association of Realtors®.
Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.
Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.
Lawrence Yun, NAR chief economist, said a soft sales pace likely will continue for a few additional months. “Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.
Daniel Indiviglio at The Atlantic:
The housing bears were right: existing home sales fell off a cliff in July. As my colleague Megan McArdle just noted, they sold at an annualized pace of 3.83 million, down by 27% versus June and 26% below July 2009, according to the National Association of Realtors. This is the lowest rate since NAR began keeping track of monthly sales in 1999. It’s also far worse than the rate of 4.7 million sales that the market expected.
This number is the lowest that the NAR has ever reported, and I can see why it spooked the markets, sending 10-year Treasuries breaking through the 2.5% level: we’re seeing less housing market activity now than we were even during the depths of the crisis. According to the NAR, there were 4.94 million existing homes sold in 2007, 4.34 million sold in 2008, and 4.57 million sold in 2009. The latest annualized number in that series, for July 2010, is just 3.37 million. That’s a 26% fall from last year’s rate.
The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.
The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.
Houses are rarely a liquid asset; they were, briefly, during the housing boom, but now they’re more illiquid than ever. America is a country where two generations of homeowners have learned to consider their houses an asset; they’re rapidly learning that at times like these, a house can look much more like a liability. (And refinancing your mortgage is just liability management.) The enormous repercussions of that change in mindset are only just beginning to be felt.
Joe Weisenthal at Clusterstock:
Not surprisingly, the end of the homebuyer tax credit caused these sales to fall off a cliff. People just didn’t realize how high that cliff was.
In case there were any doubt that it made a difference, check out this chart from Waverly Advisors which shades in the period of the tax credit.
Home sales started rising immediately, and have fallen off immediately with the tax credit’s expiry.
Megan McArdle, who just bought a house, reports that she and her husband “were astonished by the effect that the tax credit seemed to be having on people. Prices were climbing rapidly, as people got into bidding wars that raised the price by more than 8%. Inventory vanished rapidly; the average days on the market for a new property that wasn’t ridiculously overpriced, half-finished, or occupied by tenants who wouldn’t let the place be shown, was 1-4 days.”
That’s been my sense too, which is remarkable since $8,000 shouldn’t be that big an incentive to buy something as expensive as a house. But then again, maybe that’s the Southern Californian in me talking. $8,000 isn’t a huge incentive if you’re buying a $500,000 house in Los Angeles or Orange County, but it’s probably a much bigger deal if you’re buying a $150,000 house in Little Rock.
In any case, we better hope this is just a short-term effect from housing sales getting artificially pulled in a month or two to take advantage of the tax credit. If it’s not — if the tax credit really was propping up the market — then we’re in for yet more economic pain. Slow housing sales drive lower house prices, and lower house prices have an outsize effect on consumer spending and on economic growth in general. Buckle your seat belts.
The depth of the collapse suggests that in fact, the housing tax credit was not generating new demand as much as moving demand forward a few months. That means that we’re going to have to work out the aftermath in months of low home sales.
The NAR report strives to accentuate the positive, but this isn’t easy, when the “positive” consists entirely of a modest year-on-year price increase. Given mortgage rates at 4.5% for a 30-year fixed, and a historic mutli-year collapse in home prices, the fact that we managed to eke out a 4% year-on-year increase isn’t exactly comforting.
Should we rethink buying a house? Well, we can’t; at this point, we’re couch-surfing our relatives while we wait for our house to close; there’s no way out but forward. And in our case, we’re planning to stay put for a long time, so as long as DC rents don’t utterly collapse, this is still a good plan for us. But this only reinforces my belief that housing is no longer a good way to generate wealth. The government can’t fix this market, which needs to find a new, lower level. It can only very temporarily distort it.