New development: Home sales up, home prices down

It’s been going on in California for awhile. But now, with additional foreclosure sales elsewhere, it looks like a phenomenon is underway.  The number of transactions is rising (up 17 percent nationally in May from a month earlier, according to NAR) yet home prices continue to fall (down now 32 percent nationally from the mid-2006 peak, according to the latest Case-Shiller numbers).

Fortune Magazine, in its June 19^th article on cnn.com, reports that increasing sales volume may be indicative of a coming bottoming out of house prices, although median prices are expected to continue to decline.  Fortune reports that prices should continue to fall at least until mid-2010, another extension of bad news.  The primary reason is the multitude of resets scheduled over the next 1.5 to 2 years for option ARMs and Alt-A mortgages. Prices are vulnerable as mortgage terms become less favorable for many existing homeowners. Rising unemployment figures do not help either.

Some commentators have begrudgingly concluded that as much as another 20 percent reduction in median house prices is possible. This is surprising given the declines to date.  It means we are far from through the weakness in residential markets.

More strikingly, according to the Fortune article, the “bulls” look for flat house prices by the second half of 2010 at the earliest. The “bears” anticipate falling prices until 2013! Regardless of the timing of the bottom, nearly everyone writing on this subject agrees that it will be many years before house prices begin to appreciate once again. Many years.

It is definitely “back to basics” for residential markets: housing is best viewed as a consumption good with a very long life of providing valuable housing services. While there are investment attributes, including favorable tax benefits, associated with home ownership in the US, residential housing as an investment doesn’t look so attractive right now.  The tax benefits are likely to be built into the price already, regardless.

NAR acknowledges that the total reduction in household wealth nationwide may now approach $5 trillion by the end of this crisis. It is good news that transactions are increasing; just don’t expect higher prices for your long-term, depreciating, consumer durable.

Related posts:

1. Jaffe predicts home sale activity may increase in 2010

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Tags: sales

This entry was posted on Tuesday, June 30th, 2009 at 7:35 am and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed.