In the musical Annie, The Sun Will Come Out Tomorrow was the happy tune Annie used to keep her spirits up. Gloom and Doomers have their own ray of sunshine- David Lereah, chief economist for the National Association of Realtors. (NAR)
Today the NAR released existing homes sales data for July: Total existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 4.1 percent to a seasonally adjusted annual rate of 6.33 million units in July from a downwardly revised pace of 6.60 million June, and were 11.2 percent below the 7.13 million-unit level in July 2005.
Those could have been sobering numbers, but David Lereah, in a report by the National Association of Realtors, managed to put a positive spin on today’s housing news:
Many potential home buyers have been on the sidelines, some ‘kicking the tires,’ but mostly waiting for sellers to compromise on prices and terms. Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.
Given the current trend, “some months” shows an optimism of which even Annie might be skeptical.
The stock market did not share Lereah’s optimism today. Wall Street fell for a third straight session Wednesday as fresh signs of a housing slump triggered concerns that the economy is slowing too fast and could erode corporate profits. Investors believed that housing sales might be dropping more rapidly than anticipated, and theorized that a soft landing for the U.S. economy might be more difficult to achieve.
More pessimistic than the stock market was Nouriel Roubini, president of Roubini Global Economics:
The United States is headed for a recession that will be “much nastier, deeper and more protracted” than the 2001 recession, said Roubini.
Writing on his blog on Wednesday, Roubini repeated his call that the U.S. would be in a recession in 2007, arguing that the collapse of housing will bring down the rest of the economy.
Roubini wrote after the National Association of Realtors reported Wednesday that sales of existing homes fell 4.1% in July, while inventories soared to a 13-year high and prices flattened out year-over-year.
“This is the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices,” Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said (all emphasis mine).
Keep on singing, Mr. Lereah. We need someone to keep us smiling.
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At least some real estate professionals are abandoning their irresponsible “be smart, buy now” rhetoric. Although there are no facts about the future, predictions that we are returning to a “normal housing market” and that “appreciation” may resume during 2007 may be accurate. However, that return to normal will be cold comfort for those who think such predictions mean their homes will be worth what they thoughtthey were worth during 2005-06 and that value will then increase, albiet at a somewhat lower rate. Many markets (like Phoenix and Ft. Lauderdale) were last in a “normal” price/value relationship during 2003-04(Global Insights, June 2006). In a “normal market” price increases are correlated to income growth and buyers can purchase homes at a value 3 or 4 times their annual income, suggesting that absent abnormal circumstances ( millionaires all decide to move to working class neighborhoods in Phoenix) households with $100,000 incomes own homes worth $300,000 to $400,000, not $900,000 to $1.2 million. Finally, in a “normal market” buyers are lucky to resell within 3 years and cover transaction costs. So, a home valued at its 2004 purchase price or 2004″comps” plus about 10% may expect increases similar to inflation or income growth. This is probably not what a nation with a negative savings rate expected, but it is not normal to spend more than your make year after year and expect to make up the difference with your home’s appreciation.
I believe will probably stabilize, however, if it is the doomsday everyone is worried about, it will be a great time for bargain hunters.
Todd -
Thanks for sharing your thoughts. Note I took the liberty of editing your comment a bit (hopefully not changing the sense you intended).