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| Expect Existing Home Inventories to Remain High |
| Written by Jonathan Smoke | |
| 10.24.2007 | |
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Discuss this article on the forums. (0 posts) The National Association of Realtors released the September existing home sales report today. According to the report, total existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.0 percent to a seasonally adjusted annual rate of 5.04 million units in September from a downwardly revised 5.48 million in August.  The sales results are not surprising as they represent a continuation of what we have been seeing—existing home sales are slower and the pace appears to have slowed even further in September. While headlines are grabbing the stark contrasts to 2006 and prior, it’s actually somewhat comforting to note that despite such upheaval in the credit markets we are seeing a pace of existing home sales that we have seen before—as recently as January 2001.The effect of credit tightening will be a decline in home ownership, despite what can be done to save some households from foreclosures. The rise that occurred in home ownership, driven primarily by aggressive credit practices, effectively doubled the demand for homes in most markets as there was a demand for homes from the formation of new households and from existing households being able to qualify for mortgages previously considered beyond their means. With more conservative credit practices in place now and for the foreseeable future, those homes are again beyond more households’ means, so the ownership trend is reversing. As that trend reverses, home sales will be considered robust to stay where they are now until a new equilibrium for ownership settles. The inventory of existing homes for sale is likely to remain high until ownership stabilizes. While the national existing home median price reported by NAR declined against August and against last year, the median was impacted by a shift in more lower priced homes being sold in more affordable areas of the country. According to Lawrence Yun, NAR economist: “Because there were fewer transactions at the upper end of the market, there is a downward distortion reflected in a lower national median home price. Home prices continue to trend up in the Northeast and in the condo sector. In other areas not dependent on jumbo loans, such as much of the Midwest, prices are rising."
Existing home prices are behaving as expected—despite significant inventory pressure, existing home prices are relatively steady. Barring a catastrophe or a depression, I don't expect existing home prices to fall as dramatically as some have recently indicated. While we do see significant chances for some decline in many markets, a significant decline at the national level is not likely. With prices remaining stubborn, inventories will remain relatively high. It's a different story with new home sales.  With the dramatic loss in demand and greater substitution pressure from existing homes, new homes are being discounted so heavily that new homes nationally are trading at a discount to existing homes after adjusting for size differences. Builders are likely to continue this behavior, despite generating losses, in order to generate cash to feed the business while forcing weaker players to fold entirely. The table has been set for a war of attrition on the new home front. It won’t get better until existing home inventories decline, and don’t expect that any time soon. Armed with the right Housing Intelligence and Neighborhood Insights, you can turn this market turmoil into profitable opportunities for yourself or your company. 
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