Last Friday we warned of the rising possibility that the still depressed US housing sector could strangle the stuttering economic recovery in America.
Now there’s more evidence with a rather large and embarrassing 9.6% fall in sales of existing homes in February from January, and an equally shocking 5% drop in average house prices to a near nine year low.
And yet Wall Street was up strongly on the day as investors bought on the basis that the problems in Japan and the rising oil price (partly as a result of the Libyan fighting) would not damage growth across the world.
That’s a short sighted belief and one that flies in the face of the grim reality of the US housing sector.
After three months of rising sales, the market had been looking for a fall and had factored in a forecast for a 4.5% drop: the 9.6% was so steep that Reuters said not one of its economists (not even the most bearish) picked the size of the fall.
According to the National Association of Realtors, homes sold at an annual rate of 4.88 million in February, down 9.6% from January and 2.8% lower than February 2010 sales.
At the same time the median home price declined 5.2% compared to the previous year, to $US156,100.
"Housing affordability conditions have been at record levels and the economy has been improving, but home sales are being constrained," Lawrence Yun, NAR chief economist, said in a statement.
Yun said the housing market recovery is bound to be rocky, especially with the tight credit market.
NAR reported that all-cash sales went up to a record 33% of the total, up from 27% a year earlier. It estimated the percentage of investor purchases hit 19%, the same level as a year ago.
But the level of foreclosure sales hit 39%, up from 37% in January and the highest since April 2009.
A small rise in new home sales is expected when the February figures are released tonight, but this is irrelevant with sales of existing homes making up 90% of all sales.
A major worry remains the overhang of unsold homes.
At February’s sales pace, the supply of existing homes represented an 8.6 months’ supply, up from 7.5 in January.
A supply of between six and seven months is generally considered ideal, with higher figures pointing to pressure on house prices.
But not even that large overhang is accurate; it is certainly higher thanks to the hiatus in foreclosures while the 50 US states and the Feds negotiate a settlement of foreclosure law violations and other wrongdoing with major lenders and servicing companies.
Once that is over, the number of homes for sale will rise, putting further downward pressure on prices.
"The decline in price corresponds to the record level of all-cash purchases where buyers — largely investors — are snapping up homes at bargain prices," Yun explained. "We’d be seeing greater numbers of traditional home buyers if mortgage credit conditions return to normal."
The decrease in sales was accompanied by an increase in supply. Inventory rose 3.5% to 3.49 million units, an 8.6-month supply at the current rates of sales.
Normally, a five or six-month supply is considered a good balance between supply and demand.
The only saving grace is that the Realtors group says existing-home sales remain 26.4% above the cyclical low last July.
But the longer the current weakness continues, the closer the sales figure will get to that unfortunate low point.
The mortgage market shows that the cost of a 30-year, conventional, fixed-rate mortgage rose to 4.95% in February up from 4.76 % in January, but just under the 4.99% average for February 2010.
