The Not-So-Bright Spot in the Gloomy Housing Report

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No more need to wait for the double dip in housing. It appears to be here. Earlier today, the National Association of Realtors announced housing market figures for July and the numbers were not nice indeed. Sales of existing homes fell 27% in July from the month before. July was the slowest pace for single family house sales since May of 1995. But the NAR was quick to point out in the headline and in their news release the silver lining as well. Despite the huge drop in sales, housing prices rose:

The national median existing-home price for all housing types was $182,600 in July, up 0.7 percent from a year ago. Distressed home sales are unchanged from June, accounting for 32 percent of transactions in July; they were 31 percent in July 2009.

“Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses,” Yun said. “Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward.”

You would expect with a huge drop in sales that prices would fall as well. But that didn’t happen. The good news is that for now sellers are still getting buyers to shell out more than they did a year ago for a home. So how silver is this lining? Not so much. Here’s why:

First of all, housing prices tend to lag sales. For example, sales peaked in mid-2006 and then fell for the rest of the year. House prices on the other hand didn’t start falling until 2007. So today’s sales drop may be a leading indicator of another drop in house prices.

Second, as Felix Salmon points out at Reuters, no matter how low the Fed pushed mortgage rates the economy is going to be a major hindrance for the housing market. Potential buyers are going to stay renters as long as they can get good deals, and the employment market remains uncertain.

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.

Lastly, lots of people have been talking about the tax credit and how that has been distorting the housing market for the past few months. The claim is that the $8,000 housing tax credit caused people to rush to buy houses in the beginning of the year, and therefore making the housing market appear weaker than it is today. But as Megan McArdle over at the Atlantic points out sales were falling even before the relatively small tax credit, compared to the cost of a house and moving, expired:

When Peter and I were shopping for a house before we got married, we 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.   This was insane, given that here in DC, a modest rowhouse in an “emerging” neighborhood, with dated or incomplete renovations, starts at $300,000 and marches rapidly north from there.  A relatively small tax credit should not have driven people into such frenzy.

So what’s going on here? I called Celia Chen who covers housing at Moody’s and she had this interesting take: It might not be the housing credit that is wreacking havoc on the housing market. Another government program might be doing the trick: HAMP. For the past year or so, the government’s program to help people refinance their mortgages into affordable loans has been slowing the pace of foreclosures. But the key word is slowing. Most of the those foreclosures are likely to happen anyway, because statistics from HAMP show that most people who get trial modifications end up dropping out of the program or not getting approved for the actual loan modifications. So for the past few months the number of distressed sales, or sales of homes by banks that are just trying to unload properties as fast as possible, has dropped or remained stable. That has hurt sales, but helped prices. And the result is what we saw today.

But this trend is likely to reverse soon. As those modifications have failed more and more banks have begun to take back properties. From RealtyTrac:

July’s bank repossession (REO) total was the second highest monthly total since RealtyTrac began tracking REO activity in April 2005 and was 1 percent below the monthly REO activity peak of 93,777 in May 2010.

So the good news, I guess, is that the huge drop in sales probably is temporary. Banks will start unloading these properties, and sales will rebound. The bad news is that those sales will probably happen at much lower prices.