No Spring Thaw for Housing


Spring is usually the hot time for home sales. But this year, March results were terrible—and April and May don't look much better

Maybe you guessed it, but now it's official: The housing market has not hit bottom. Poor home sales in cold-and-quiet February may be excusable; but in March, April, and May, they are a sure sign of distress. The latest numbers indicate that the spring of 2007 will go down as one of the worst real estate seasons in years.

March, April, and May are traditionally the strongest months for home sales. Pleasant weather draws shoppers out of hibernation, and buyers want to get settled by summer so they can take their vacations and be ready for the coming school year. In the Northeast, interested buyers venture out in the wet season to settle fears of leaky roofs and flooded basements.

But this year, the usual throngs of spring buyers just aren't there. On May 1, the National Association of Realtors reported that home sales closed in April will remain soft, with some drag possible into May. The NAR's Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, dropped 10.5% from March, 2006, and 4.9% from February, 2007, to 104.3, the lowest reading since March, 2003.

Waiting for April Results

The prediction for home sales in the coming months was worst in the Northeast region, where the index fell 14% year over year and 4.9% from February's reading. The West showed the most promise, with the index rising 1.6% from February but still falling 8.6% from year-ago levels. NAR does not break out sales by state.

The rate of existing home sales actually increased in February of this year, prompting NAR Chief Economist David Lereah to point to "signs of stabilization" and predict a leveling out of home sales in the months ahead. But in March, existing home sales fell 8.4% year over year, marking the sharpest plunge in 18 years and the beginning of what is sure to be an illuminating spring season.

"March [home sales] weren't anywhere near where they should have been, but April is going to be the month that reveals that things really aren't good," says Pat McPherron, housing economist for Moody's Economy.com. "If April doesn't go well, then that's it. This is the market."

Blame It on the Weather

What squashed the spring boom? February's unseasonably cold weather, like January's unseasonably warm weather, jumbled the normal cycle. But despite better weather in March, April still isn't looking up. Even before the NAR announced the March drop in its Pending Home Sales Index, the National Association of Home Builders/Wells Fargo Index measuring builder confidence fell to 33 from 36 in March (a reading below 50 means most respondents view conditions as poor).

Now, most of the blame has fallen on the new stricter lending that has reduced the pool of potential buyers. "Although the weather improved in March, we're starting to see the effects of a decline in subprime lending and tighter lending standards," Lereah says of March's Pending Home Sales Index reading.

But tighter lending standards from companies such as Washington Mutual (WM) and Merrill Lynch's (MER) First Franklin are only part of the problem. "Even if they kept [standards] the same you wouldn't get the same recovery," says McPherron, noting that house prices accelerated faster than incomes during the housing boom. "What [subprime lenders] have done is stopped the bleeding."

Eyeing a Better Second Half

The NAR will revise its home sales forecast on May 8 and release existing-home sales for April on May 25. Lereah now predicts that home sales will remain "sluggish" in the second quarter but sees a "modest uptrend" during the second half of the year.

McPherron, on the other hand, says he wouldn't be surprised if home sales were still soft well into the summer months, even though year-over-year comparisons could improve. And if the trend set in March continues, as the numbers suggest, into April, May, and beyond, the many sellers who are struggling to make their mortgage payments and holding out desperately for a spring buying boom could be in for a shock, at least, and foreclosure at worst.

"Many people think, 'if I can just hang on 'til the spring,' they will get an offer," says McPherron. "This spring, they'll be lucky to sell."

Click here to see a roundup of 10 housing markets headed for a decline.

Roney is Real Estate writer for BusinessWeek.com.

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