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Tuesday, November 28, 2006

RE: October Existing Home

Hmmm. Sales are up, compared to September, but median and average prices are down for the nation as a whole, and months of supply are still increasing. I'm sure NAR has a very optimistic press release, but the numbers don't look favorable.

There are 7.2 months of supply for single-family homes, up from 7.1 months of supply in September. Prices by region compared to October of last year:
National: median price dropped 3.4%; average price dropped 3.2%
Northeast: median price dropped 5.2%; average price dropped 2.7%
Midwest: median price dropped 2.2%; average price dropped 0.3%
South: median price dropped 6.7%; average price dropped 8.6%
West: median price dropped 0.1%; average price rose 0.2%.
There are 9.1 months of supply for condos/coops, up from 8.5 in September. Prices by region compared to October of last year:
National: median price dropped 5.3%; average price dropped 4.4%
Northeast: median price dropped 4.0%; average price dropped 2.5%
Midwest: median price rose 3.8%; average price rose 3.7%
South: median price dropped 12.1%; average price dropped 10.2%
West: median price dropped 12.2%; average price dropped 7.1%.
There are substantial sales incentives included in contracts (such as credits at closing for buyer's costs) which are not included in these figures, so real losses are higher. The stronger regions seem to be softening, such as the Seattle area. As the cookie crumble these drops will start to mount quickly, and you can expect new listings to mount in the spring. It's very, very hard to even imagine a scenario in which prices could stop falling next year, especially given the growing economic weakness in the general economy.

This is what is going to force much higher numbers of foreclosures; costs for selling are usually a minimum of 5%. If you've lost 5% in price and have to pay 5% to sell, you'd wind up having to bring $40,000 to the table in the form of equity or cold hard cash for the privilege of unloading a house selling for $400,000. Very few recent buyers have the cash to do that. Fewer and fewer recent buyers have the equity.

These price declines are setting post WWII records. Even in the Great Depression, housing prices didn't fall all that fast nationally at first. We are in unprecedented territory.

Here is an interesting article about Bernanke's career and views on the danger of deflation from December of last year. I think it likely that the Fed will start to cut aggressively in the first quarter of 2007 if they have any margin at all in which to do so.

And the Realtors Associations keep bleating "BUY NOW! BEFORE THE PRICE GOES UP! PRICES HAVE NOWHERE TO GO BUT UP! UP! UP!" (Just like black & white small-press comics in the 80s, Magic Cards in the early 90s, and dot-com junk stocks in the late 90s.)

It's like consumer electronics. Just wait for the price to go down and keep going down; the longer you hold off buying, the cheaper it gets.

The Headless Unicorn Guy
You have to feel sorry for the condo buyers in some areas. They are toast!!!

The flattening effect is kicking in already.
deflation...OTOH, wouldn't you expect declines in the dollar to create inflationary pressures, since such declines raise the (dollar) price of imported goods? Weaker dollar also helps American export industries, which makes capacity tighter and also creates inflationary pressures.
David - I think the contraction in credit is going to exert deflationary forces that will counterbalance the dollar's effect, although I do think continued weakness in the dollar will help exports for a while. Our trade imbalance is severe enough that I don't see this being a problem.

We will need stimuli next year to take up the slack in domestic investment caused by the recession in the housing industry, specifically new building.
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