Home prices down and unsold listings way up

Posted by: Prashant Gopal on May 23, 2008

The big news in the April existing home price report released today by the National Association of Realtors wasn’t the 8% drop in median home prices or the better-than-expected 1% decline in sales.

It was the eye-popping 10.5% jump in the inventory of unsold homes. The number of homes available for sale jumped to 4.55 million at the end of April, representing an 11.2-month supply at the current sales pace. There was a 10-month supply of homes at the end of March.

“The increase in inventories is a bad sign for the next several months,” Bill Hampel, Chief Economist for the Credit Union National Association and Affiliates, said after the data was released. “It means we’re not out of woods yet.”

There’s no shortage of bad signs. On May 22, the closely-watched Office of Federal Housing Enterprise Oversight’s home price index posted a 3.1% decline in home prices for the first quarter compared to a year ago – the biggest drop in the index’s 17-year history.

The drop was significant because, unlike other measures, the OFHEO purchase-only house price index tracks conforming loans of no more than $417,000, which are owned or backed by Fanny Mae and Freddie Mac. What it doesn’t include are homes financed with the risky subprime loans and jumbo mortgages (for more expensive home purchases).

“If the OFHEO index is showing weakness — and it is the least likely to show a home price decline — then there is serious downward pressure on prices,” Hampel said.

Reader Comments

Michael

May 23, 2008 12:19 PM

Right now could not be a better time to buy a home! The primary difference is right now in the state of Colorado we are not "down" we are just slower than the last 5 years that have been historically high! It’s really all the "bad press" that you hear daily which suggests things are bad. If I told you several times a day that you look sick - and I continued to tell you that day after day – eventually you would start to actually feel sick!

What's going on in Colorado real estate right now is just simply symptoms of the above. Most of the issues are not reality based for our regions true statistics. Based on 10 year averages we are just slightly behind the curve for average amounts of sales. With interest rates still at 30-40 year historic lows, buying a home right now is a great deal. You will be able to take advantage of the folks feeling "sick" and who will be happy to "sell with out much of a challenge to your offer – since they have accepted that things are bad! Investors should be scooping up all these cheap houses on the market.

The final and most important reason to buy now is – prices have been flat for several years in our area – if you buy now, you will be in a position to ride the real estate wave back up - instead of waiting until you read "good things" in the media reports again – by then it will be too late to capture a great equity position in the near future by purchasing a home right now!

I think real money is to be maid in buying houses cheap right now or investing with a smaller builder on a specific project.

Michael
www.ArtesianVC.com

Karl

May 23, 2008 01:48 PM

The TRUTH is finally being revealed!! It was NOT a "sub-prime" problem after all!! This thing is BIGGER than anyone ever thought!! The BIG problems are now being realized for the USA! I wonder how much this one will cost?

Ruch

May 23, 2008 02:16 PM

I agree. also, the more important question is how will they clear this inventory ??
Tight lending, higher gas prices, baby boomer downsizing etc.

Scambuster

May 23, 2008 02:25 PM

For more than several months ago, Gopal and others talked-up about real estate opportunity during this recession. They gave rosy views about big bargains available and how others were capitalizing. For more than several months ago, I told readers to ignore these info-commercials. I told readers to "Don't Get Suckered In" by these nonsense coming out of con-artists trying to unload their pink elephants to the unsuspecting and naive. In addition, I told readers to expect more price decline again and again. I told readers that this recession will be the most severe, longest, deepest in the history of US -- this will still have to be born out. One more prediction: soon, the other shoe will drop.

Nick

May 23, 2008 02:55 PM

This situation will get out of control, and we will be lucky to live through it!

Sally in Chicago

May 23, 2008 03:02 PM

If this is true, it aint the same in Chicago where the developers continue to overbuild and build condos. In my neighborhood we have so many empty high-priced condos sitting on the market, not even half-filled. And when they can't sell them they rent them at high prices. Nobody is expecting the developers to rent to Section 8 tenants, but they have to be realistic. Why would somebody pay $1400 to rent a one bedroom condo? It would be better to buy. Oh....I forgot nobody's buying.

Sam Siphandone

May 23, 2008 04:38 PM

Don't buy the house yet........ wait till next year or two!!!!!!!!!!!

Dan in Austin

May 23, 2008 05:10 PM

Our market has slowed but median price up over 2007. Resales and new home sales still healthy under $500,000.

Charles in Atlanta

May 23, 2008 05:24 PM

The solution to the growing inventory of unsold homes is to let the free market system work on its own without outside interference. When sellers gain a sense of reality, home prices will find an equilibrium and the problem will begin to sort itself out. If the government gets involved, it will only delay the recovery.

chancy

May 23, 2008 05:35 PM

I have believed that the builders outpaced demand and that is what is behind the real estate problem. Commercial real estate is the next big problem; Gas prices will push shoppers more to the internet. If we could only drop demand for gasoline.

Fab

May 23, 2008 05:58 PM

Karl is right. I check with local realtors and many are leaving their jobs and returning to work as bank tellers, teachers, and office people.
Inventory has been understated for a long time. I simply did not trust those numbers. Isn't greed predictable?

Harry

May 23, 2008 06:05 PM

In Silicon Valley ,CA some folks are renting houses at the range of $1/sq.Ft. The Renters are waiting for the prices to fall and the owners are now having a cushion for the sky high prices(Median Price in Silicon Valley > $417 k) . So, I believe there is still a lot of room for houses to crash as soon as all these rented houses come to market.

Joe NoVA

May 23, 2008 06:14 PM

No need to catch a falling knife and buy a home anytime soon. Conserve your cash, get a hybrid and rent close to where you work & where you'll be doing most of your shopping and entertaining (restaurants, movies theater etc.). Live your life in a way that liberates you from oil and credit and save the bulk of your disposable income. Then when the time is right and the bottom has established itself, 20% down will be a breeze b/t all the money you saved and the drop in prices.

Ruthmarie Hicks

May 23, 2008 06:39 PM

It depends on your market. Real estate is very, very local. Look where the investors are buying - the places where NO ONE ELSE IS. Florida, Nevada, California - these areas are set to go on an upward trajectory. If everyone is saying "DON'T BUY" its time to BUY. It may not have hit bottom, but you won't know where the bottom is until it's over. Then you are left saying "I should have bought...."

In my area, I'm telling clients who are interested in areas that have corrected, to consider buying (anything BUT new construction - buy something that is structurally sound but needs cosmetic and minor structural improvements.) Then STAY PUT for about 4-5 years. If its an area that hasn't undergone correction, I'm telling buyers to wait.

There is a ton of pent up need to buy - but there is also pent up need to sell in my area - I'm watching and waiting to see how it balances out.

People have to recognize that as a general rule, purchasing is wiser. If you've been fence sitting for 7 years,its time to get over the pipe dream of "stealing a home" at 1995 prices. But whether it is right or wrong depends on individual circumstances.

AnnInFL

May 23, 2008 06:48 PM

What will we do with all this unsold inventory? I know! We'll have to sell it to some wealthy Chinese or Arabs --after all, we've given them all our money. Maybe they will be interested in dumping our government's worthless IOUs and purchasing some real assets at bargain prices!

Scott in CA

May 23, 2008 07:21 PM

Nick - Hunt for Red October...

jim

May 23, 2008 07:25 PM

I live in Costa Rica and would like to buy a house in the U.S.. Anyone have a house or condo for sale? Looking for something in California within walking distance to beach and shopping. Foreclosures willing to negotiate welcome.

Ria Rhodes

May 23, 2008 07:30 PM

Maybe McCain had the right quip in the wrong context. Reapply his quip to the US economy for real clarity, "It's Always Darkest, Right Before ... It Goes Completely Black." Got big savings American households?

Scott

May 23, 2008 07:30 PM

To Sally in Chicago:

$1,400 a month for a 1 bedroom condo? Sign me up!

-Scott in Santa Barbara, CA

Robert T. Boyer

May 23, 2008 07:49 PM

Although we live in a global economy, all real estate is local. Yes, a recession / depression hurts everyone, but in some areas (San Diego), the months of inventory (total inventory / number of purchases) is going down in most zipcodes. While a certain amount of this is just seasonal buying, it appears as if most everyone is being more realistic with their pricing - hence leaving less "inventory" on the market.

Jared

May 23, 2008 08:26 PM

I can't wait to buy a house at bargain basement prices!

Sally - I'm in Chicago and know exactly what you're talking about. I see some listed for sale in the mid to high 100s or you can rent them for nearly/over 2 grand a month..?! Nice..

Tri

May 23, 2008 08:45 PM

I have been looking to buy a house in Minnesota for two years, but most of the house I visited are owned by the banks who want to find a high bidder.

I got into a contract to buy one at 190K, I asked the bank to reduced it by 10K due to mold issue. The did not do so, but they reduced the house to 179K and could not find a buyer.

Brad

May 23, 2008 09:05 PM

Makes me think about all the arguments I got in to with Real Estate agents and mortgage brokers back when the so called 'boom' was happening. Letting them know this craziness will come back to haunt us 10 fold. Now many of them are going broke and looking for employment. It's amazing how greed which made our country what it is may be what does us in for good. There are so many reasons why I don't trust real estate agents and mortgage brokers. Never have, never will. Very fake people. They get paid too much money to do what they do. I'm sure there are exceptions to the rule, but I've had many bad experiences with these types of people. And I'm not even affected by this whole crisis.

As for clearing this housing inventory, how can it be fixed? With salaries not increasing, millions upon millions of people with credit problems, jobs being outsourced, employers paying less, cost of living going up. You tell me. How does the average person in America stand a chance? I'm a successful business owner and when I open a new position, we get so many resumes I have to randomly select a few and interview. And many of the people who apply already have jobs and are searching for a higher pay.

A nation built around debt is destined to fail. A nation who's currency is created by a corporation and lent to the government (with interest) is destined to fail. I sure hope not because I love America. I just don't see a solution unless we start making more products here instead of China and elsewhere. But so many of these countries buy our debt, so that will never happened.

So, my question to anyone is, how can America be fixed? Can it be fixed?
Brad
Scottsdale, AZ

Dickson

May 23, 2008 09:23 PM

Does anyone wonder what people did with the money they got for selling their home (or spec home) near the housing peak in late 2006? I keep hearing horror stories about how some family of four became entangled in the mortgage trap.

Well, whatever happened to the folks that sold at the top and what are they doing now? The banks ended up holding the bag, but somebody must have come out on top.

glen

May 23, 2008 09:24 PM

Oh please... I just dropped 430K on a house and love it. So what if it drops? So what if it goes up? A home in the USA is more accessible now than ever in history albeit for the last few years. ...and on the gas histaria.... folks in Europe were paying $4.00 a gallon in the 80s. ....to live thru it? You've got to be kidding? Go overseas for awhile and see how the rest of the world lives...

chris

May 23, 2008 09:57 PM

I am a mortgage broker in new york city and this mess was caused by real loose lending poractices by all banks as a whole. Now i have 20 turndowns to one approval...and hopefully the dirtbags and shisters in thsi business who put there clients in loans they knew they had no business in and couldnt afford the home and werent qualified for that certain loan are out of this business and leave this business to the true PROFESSIONALS. we are no where near outta the woods...by 2009 we will ahve most of these defaulting loans off these banks books and we can start figuring out how to move these homes ...It comes down to the market weatlth and people having a good feeling about there investment . The days of qualifying a person with a good credit score are well gone....the banks loosened up there lending practices cause tese loans were performing..DO NOT BLAME THE LOAN OFFICER OR THE BROKER BLAME THE BANK THEMSELVES! They opened pandoras box..Ayr and ahlf ago i could get someone 100% financing with a 560 fico score!!!!thats right 560 fico score....and 3 tradelines..and i could roll your closing costs into the loan...now tell me why you would lend 100% on someone taht cant pay there cell ohone bill on time but you are willing to give them a 500,000 dollar home and cry after they cant make the payment! GET REAL! its back to giving the people who deserve those types of loans that exotic financing not some dirtbag ...in collections!

Holly Garfield

May 23, 2008 10:14 PM

The price of the house doesn't matter if the buyer can't get financing. Lenders aren't lending because their money is tied up in reserves and what's left the banks are watching like a hawk. This is the knee jerk reaction to being too liberal. Eventually the banks have to lend or they go out of business, but that isn't happening yet. For now its cover future losses with reserve stockpiling. In the meantime buyers should stockpile a down payment. When the time comes there will be bargains galore.

hotpepper

May 23, 2008 10:48 PM

The realestate crisis looks more and more like the crisis in Japan where house price dropped dowm more than 60%. I wonder how many people will be in the "upside down" equity situation and how many bank will go belly up?

richi jr

May 23, 2008 11:09 PM

U.S. City Governments want to keep the house prices high otherwise they will have a huge deficit like california....If house prices come down then all of us will have to pay higher taxes to compensate the deficit....If we save our money, might be worst because inflation...WALL STREET REALLY SCREW ALL OF US UP

amad

May 23, 2008 11:11 PM

this is going to be the longest worst recession in US history!

Lynn

May 23, 2008 11:42 PM

It would seem that for the housing market to "bottom out," we would have to see purchasing increase. For the middle to lower financial class of citizen, cost of living has slammed the majority of us to the wall, and we do not have the money to go out and buy a house with inflated insurance rates (I live in Florida), and high taxes. I know it's not the same everywhere, but to extend oneself financially to buy a house under the pressures of gas price surges with no end in sight, food prices skyrocketing, etc., it is safer to stay put, and if that means renting, so be it. Gas prices will continue to disable America in every way for the forseeable future. We cannot control it, and it undermines every single aspect of how healthy a country's financial structure is. The falling dollar is another serious problem, and America is going (has gone?) upside down in it's ability to cope with these many financial stressors. I am an optimist by nature, but I have to admit that I do not see an end to any of it any time soon, and I think we need to dig in for the very long haul.

Heidi in Massachusetts, but not for much longer

May 23, 2008 11:45 PM

My husband and I are happy to wait it out, and we are preparing to move to an area where property greed doesn't get us into the kind of debt that ruins people's lives.

I think there are lots of folks in their 30s and 40s who are fed up with the bad market whinging. Bad for whom?

In other words, we're willing to rent a while and take the loss; we're willing to go set rather than see you win.

Let the houses glut the market, let the prices fall! No sane person wants to buy a condo for half a million dollars. There is no place on the planet wonderful enough to justify that price in a rational person's mind.

Jiimmy

May 24, 2008 02:44 PM

Prices of houses will continue to go down until it reaches at least the value of houses in year 2000 adjusted to inflation. If inflation is 5% annually, then a $100,000 house in 2000 should be around $140,000 today or a factor of 140%. Prices will reach this level maybe around early 2011. This is the time when all 5 year arms had reset and foreclosures is minimal and the economy had stabilized. Inflated prices is due to speculation and wall street greed. Remember, when majority of housewives start to invest in something, expect a bubble to burst.

Matelot

May 24, 2008 03:12 PM

yeah !!! Keep on droping !!!! so I can buy a house !

Nick Lanel

May 24, 2008 08:29 PM

People got a excited when they saw rates drop. This won't do a thing. Yes rates are low, however, the rates being low removes the incentive for lenders to lend at such high risk. It's a catch-22. This isn't over by a long shot. Perhaps another 20% drop in prices AT LEAST

bob

May 24, 2008 09:10 PM

And now, I suspect, the folly of home equity loans becomes apparent?

nate

May 25, 2008 03:19 AM

TO NICK; I ALSO LIKE THAT QUOTE FROM HUNT FOR RED OCTOBER

Tommy

May 25, 2008 06:02 AM

I used a flat fee realtor to sell my home. I was very happy to sell in Las Vegas before all these short sales came out. Prices are dropping trust me I look anyway here is the link to save maybe 20 grand and get the hell out.

http://www.mlsisland.com

Its good in most states I think.

glenford

May 25, 2008 06:51 AM

I'm glad that some of us have seen the economy for what it is. The Question now is, when will the rest of the country wake up. Not soon enough i fear. i like you guys have seen the continued building and i'm wondering...what are they thinking???

Mark

May 25, 2008 08:36 AM

Ahhh...the chickens have come home to roost...the perfect storm...a combination of rampant speculation, dangerously easy money, predatory lending, an uneducated public, and the persistent selling of the "American Dream"...

In my humble opinion, this is a situation created by investors for investors...anybody tracked apartment construction lately??? Its booming! This housing bubble was created WITH the knkowledge that it would burst...who pays???...the American public...quite unfortunate, but here we are...and the rich get richer.

No smoke, no mirrors

May 25, 2008 09:20 AM

Anybody asked what the "normal" inventory is? Anybody asked what the "normal" rate of sales is?

At the height of the frenzy, anything could be sold in seconds - we had a Florida condo (oh, the horror!) which we sold for 100% of our asking price within three hours of the appearance of the ad - and we had three backups with deposits in case the deal didn't close.

While that was a wonderful experience, it was NOT typical of the "normal" real estate market. Everyone is creaming about 10 month's unsold inventory - but what rate is that compared to? Real estate doesn't sell instantly - it is NOT considered a liquid investment. If the normal time on market is 120 days, while yes, the market has slowed down, the "hole" isn't as deep as the doom criers would have us believe.

Real estate also "normally" doesn't sell at 100% of asking price, either. The "usual" number is 85 to 90%, so if you compare "normal" transactions against the recent real estate frenzy of overpriced speculations and instantaneous sales, then of course it will look like a disaster today.

The benchmark isn't realistic - we need to compare today's market and prices over a longer time scale than "last year" or "the year before", which were NOT typical years for real estate.

theantibush

May 25, 2008 09:50 AM

Don't buy the house yet...move your savings offshore and away from dollars, and get your plan together to move to a better country where it actually makes sense to buy a house.

Mike

May 25, 2008 11:00 AM

The unsold home inventory and listing prices are correlated inversely.

I'm waiting for things to get worse, so I can get a great deal on my first home.

Housing prices/values have be artificially inflated over the past 5 years or so. It only makes sense that this artificial inflating wouldn't last forever. Now, house prices/values will gravitate towards realistic prices/values.

JohnB

May 26, 2008 12:50 PM

Mr Gopal, please do the following:

Take a graph of home prices over the last 20-30 years. Draw a straight line of the trend in those prices, excluding the last 5-8 years. Now superimpose the lastest years on top.

Yes, folks, thats how far we still have to drop until we are back in line with long-term price trends.

People are wringing their hands over this. Its common sense, people. Nothing fundamentally should have altered that long term trajectory over the last several years. We'd had 9/11 and the fallout from dot-com boom and bust and wars going on. The economy was artificially over-stimulated. The structural change has been the continual offshoring of jobs to India and China - both things that should have resulted in the opposite effect to the one we actually saw. The price has to be paid, and it'll take a long time to pay it because we've had 5-8 years of fantasy-land financing from this government and the Fed.

Mark

May 26, 2008 02:21 PM

A word of caution about the statistics.

Real estate is a market based phenomena; it’s somewhat specious to talk about a national real estate market when there is so much dramatic variation from market to market. Yes, there are real estate markets with bloated inventory (much worse than the national average reported), dismal affordability, sky-high prices, and devoid of buyers.

There are also markets out there that have continued to appreciate in value at reasonable rates, with very appropriate inventories, and with rational pricing. Most of these “preserved or recovering” real estate markets are in communities with sound employment dynamics and stable or growing populations.

Valuations in overpriced markets are likely going to continue to drop until reasonable measure of affordability are reached; only then will inventory constrict to a reasonable balance (5-6 months).

Whether you’re a potential or active home-owner or investor, you need to know the facts about your home market or your market of interest. Don’t assume the national data applies to you, it most likely doesn’t.

Mark McGlothlin, MD
CEO, Redfish Emerging Markets

Toby

May 27, 2008 02:15 AM

Many lenders have put off foreclosure hoping for a turnaround. Expect June-July to be a tipping point for a tsunami of foreclosures, and falling prices.

Victor

May 27, 2008 11:59 AM

This is actually good news!

The housing market has been artificially inflated due to bad lending and appraisal practices. Now that we're moving to a stricter lending req's and a proliferating inventory, home prices will have to come down to correlate with incomes. Our income(purchase power) was greatly exageratted by the amounts we were qualified to borrow. Not to mention that all of a sudden, everyone was qualified to buy a house due to shady lending practices.
Any bailout plan will only cost tax dollars and prolong the problems many folks with bad loans are facing today.
I hope home prices continue to drop for the next 5 years.
When they finally seem attractive at the income levels, those who save for down payments will deserve to own a home.

American Man

May 27, 2008 03:20 PM

I am so grateful for the Bush tax cuts. Man that boy sure knows how to put money in your pocket and let you keep more of what you earn. Too bad Bush can't run for a third term he has done such a good job at protecting the assets of the wealthy at the expense of the citizens of the United States.

Mr_Dave_O

May 27, 2008 03:26 PM

“The increase in inventories is a bad sign for the next several months”

Why only the next several months? Is the inventory supposed to drop after that, and if so, why?

Duffy

May 27, 2008 05:59 PM

Brad, Scottsdale, AZ;

You asked the question. As a Canadian I notice one major thing that makes us different from our cousins down south. It is your williness to accummulate horrad amounts of debt that you know can't possibly pay back after being convinced this lifestyle will never end and you should impress upon people that you are living the "American Dream" of wealth & success at any cost while all the time you're swimming with financial sharks (banks/mortgage companies, credit card companies, retailers, real estate brokers, etc.) who are willing to convince you that 40 year mortgages are great, 21% interest payments on C/cards are acceptable and you should't feel bad paying the minimum, and real estate agents telling you it's never a bad time to buy investment property even if you don't feel your job secure today. These people are not your buddies doing you a great favour. They are sucking the life blood out of the middle class. Get rid of the extra credit cards (except the one that you need for necessities), cut the amortization on your mortgage whenever you can and don't listen to real estate agents or mortgage brokers. Look at the trouble they have caused you. Suffer if you need to but cut your debt, even if you're not impressing your friends and neighbours without your fancy jewllery, cars, homes or your season box seats to your favourite NHL team. At least you will sleep at night knowing you are living within your means and before you know even though your union bosses have made your salary uncompetitive in the global market you will wake up one morning with some loot in your jeans that you don't owe to anybody.

bill calif

May 27, 2008 09:29 PM

to dickson
in response to your question what did people do that sold at the peak. i sold several properties in calif that had gone up close to 100% in 2 to 3 years and bought in a small town called steamboat springs co. the real estate in steamboat has been going up at a steady rate of 37 to 40 % per year for the past 3 years. this year looks to be the same.does anyone have another town we the property is going up at that rate. would love to know

R.Switzer

June 9, 2008 07:44 AM

Since each of us is in circumstances quite unlike the rest of us, any action by the government to help some of us is guaranteed to harm others of us. Get the damned government out of it; they've caused enough trouble already.


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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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