Houston Democrats

Home Prices are dropping

The median price of a home fell in July by a whopping 7.2%.

And the details paint an even more alarming picture of the staggering decline in the U.S. housing market. Since April, median home prices have fallen 14% ... They fell from $236,300 in April to $203,800.

Rule number one for markets: dropping prices indicates the market is contracting. The price of real estate has increased for the last 3 years. Real estate is one of the best performing asset classes from a total return perspective. However, it appears that trend may be near an end.

Sales of Existing Homes Decreased Last Month

In July, sales of existing homes fell by 2.6 percent even though the nationwide median price rose to a record $218,000.

One month does not make a trend. It could easily be explained as a temporary aberration caused by any one of a number of factors. However, it is a drop and it is imperative to keep an eye on this number.

New Home Sales Aberrations

The Census Bureau reported that sales of new homes and homes built for sale increased 6.5% nationally and 11.2% from last year’s June-July period. However, this statistic is somewhat misleading. The West’s and Northeast’s sales figures jumped 35% and 10% respectively, whereas the South’ and Mid-west’s decreased 3.4% and 13.5% respectively. The jump in the West’s number is the largest in the last 12 months. The second largest jump was 17.64% between September and October last year. This indicates this increase is most likely a 1-time event that won’t be repeated in the coming months.

This number was unnoticed in the financial press. It appears someone in the Western region made a huge buy of real estate – the largest in 12 months. It was nearly twice as large as any increase in the preceding 12 months. Deals of this magnitude do not come around everyday and it is highly doubtful it will occur again.

Inventory Increases

The number of condominiums and single-family homes listed in the Manatee County market shot up to 1,810 at the end of August, a whopping 157 percent increase from the 705 listed during the same month a year earlier, Manatee County's Multiple Listing Service shows.

In Sarasota County, the increase was not as dramatic, but inventories were still up 35 percent. There were 1,295 listings at the end of July compared with 956 at the end of July 2004, according to data from the Sarasota Association of Realtors.

But there are signs that Providence's overall housing market is cooling. Realtors say appreciation rates are slowing, and an increased supply of homes is tilting the market in favor of buyers. In July, the number of active listings statewide rose 31.7% to 4,468 from 3,393, according to the Greater Providence Board of Realtors.

There are risks of oversupply in parts of South Florida and Las Vegas, in particular, said Jack McCabe, CEO of McCabe Research and Consulting LLC in Deerfield Beach, Fla., and there is less appetite among lenders to finance high-rise condo developments.

"In Miami alone we have over 100 residential towers that are either under construction or have been announced. Many of those projects that haven't been started yet we are projecting will not get built or will resurface as different types of developments," he said.

As I mentioned in the opening paragraph, real estate is a local market. Therefore, drawing national conclusions from a few markets is not sound. However, these are not the only local markets experiencing an inventory increase.

Affordability

More than 50% of state residents who bought in the last two years spent more than a third of their pretax household income on housing, the top threshold recommended by the Department of Housing and Urban Development. An additional 20% paid out more than half their earnings, according to a study released last month by the Public Policy Institute of California.

The run-up in debt has been fueled by soaring home prices and made possible by lenders willing to give borrowers mortgages that eat up 40% to 50% of their total income, the study noted. And even among those who spend less than 30% of their income on housing, an increasing number have interest-only, no-down-payment and negative-amortization loans, leaving themselves vulnerable down the road.

This is boom time for mortgage lenders. Therefore, they are doing everything they can to increase their business. As a result, they are using many less traditional loans like interest-only loans and adjustable rate mortgages. While these products have their proper place in the realm of financial tools, there are serious questions about the appropriateness these less-traditional loans for many recent buyers. In addition, real estate appreciation over the last few years has made housing less affordable for many buyers. Simple economics states that fewer buyers = lower demand = lower price.

Increasing Interest Rates

"I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," Moskow said in a speech to the Futures Industry Association, echoing hawkish comments he made Aug. 24.

Inflation risks are higher now than a year ago because the U.S. economy is running nearer to full potential, making unfavorable cost developments more likely to feed through to core inflation, he said.

If expectations of higher inflation become ingrained, "the Fed would need to respond accordingly in order to restore price stability," said Moskow, a voting member of the Federal Open Market Committee this year.

A number of people – myself included – felt the Fed would halt their pace of interest rate increases as a result of Katrina. Moskow’s statements from yesterday’s speech indicate he at least will remain hawkish on inflation. Other Fed governors may follow his lead and vote to raise rates at the next meeting.

Economics and law share one very important characteristics: there is rarely one fact that determines the outcome of an event, but instead the weight of the evidence dictates a policy decision. The facts presented above – increasing inventory, decreasing prices, lack of affordability and increasing interest rates – alone would be an aberration. However, together the tip the scales to the conclusion that housing is cresting.