Thursday, January 25, 2007

Bulls Ease On Off The Cliff

Today, the National Association of Realtors released its monthly “Existing Home Sales” report for December along with a worn-out attempt to spin a “market easing” message.

As David Lereah puts it:

“Despite all of the doom-and-gloom stories and dire predictions over the last year, 2006 was the third strongest year on record for existing-home sales…”

Unfortunately, what Lereah forgets to mention is that the decline to home sales for 2006 was the greatest on record since 1982 dropping over 8.4% nationally.

To put this in better perspective, the 2006 sales decline has handily surpassed the sales decline set by the housing bust of the late 80’s and, on a multi-year basis, it appears that the sales declines may match or even beat the record declines set in 1982 when the economy was flagging and mortgage interest rates were in the high double digits.

Given that mortgage interest rates are at historically low levels and employment is unusually strong, the exceptional drop off in home sales in 2006 is quite remarkable.

What we are seeing is clearly NOT a typical recession led housing bust but rather a collapse of a speculative bubble that in many areas had been inflating for a decade and in most areas ran white-hot for the last five years.

The reality is that there remains an unprecedented number of both “investors” (i.e. poorly equipped speculators) as well as over-stretched homeowners who are desperately attempting to exit the market.

Although current inventory has dropped due to the typical seasonal cycle, the spring will bring a renewed rush of even greater numbers of sellers possibly producing the first true signs of widespread panic as sales continue to decline and prices begin to show more substantial downward pressure.

Below is a chart consolidating all the year-over-year changes reported by NAR in their December 2006 report.

Particularly notable are the following:

  • Sales were down across every region and for every home type with particularly significant declines seen in the west.
  • Inventor and Months Supply were again up double digits.
  • Median prices in the Midwest region showed a substantial single monthly decline.



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