Existing Home Sales Drop In July 2010 – What Should We Think?

Existing home sales fell 27% YoY and 30% MoM using unadjusted data in July 2010. We are witnessing the aftermath of the expiry of the government’s first time home buyer’s credit. The graphs below (hat tip to Calculated Risk) shows the severity of the fall.

This kind of drop following expiration of government incentives was expected. The National Association of Realtors (NAR) Pending home sales released last month almost exactly forecast the decline.

The real question is what is next. The NAR’s press release:

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.

Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” Yun said.

Basically the NAR is saying this drop is not a concern – even though mortgages can be had for 4.6% and this did not uplift the numbers. My take is more conservative. There are no fundamentals that are currently apparent to increase home sales in the short term. In fact, there are growing negative fundamentals:

  • unemployment is trending up
  • stock market levels (effects individuals asset level)
  • slowing economy

Homes are becoming a very non-liquid asset for a growing number of Americans. For now, there is no capitulation by homeowners. Existing home inventories remain inside recession lows – homeowners are waiting for the market to improve.

No one can foresee the next step. My guess is that home sales will remain weak with prices slowly driven down by homeowners who must sell (and reduce prices). We have already exceeded the decline and duration predicted by Reinhart and Rogoff with their historical models.

There seems at this point to be little chance the housing market can improve before economy. The longer the economy remains in the Japanese L, the greater the chance of another major leg down on housing prices.