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Housing Decline “Takes Your Breath Away”

Posted by Larry Doyle on June 23, 2010 2:03 PM |

I was initially reluctant to write about the decline in New Homes Sales reported this morning. Why? Despite all housing reports to the contrary, I have been consistent in remaining bearish on our housing market. I view this report as merely ‘old news’ here at Sense on Cents.

Oversupply, shadow inventories, and limited mortgage credit have merely been disguised by government props and interventions. Ultimately, those props and interventions wear out or expire and the days of cold, harsh reality set in.

Well, today got mighty cool and very real as New Homes Sales plunged by 33%. Am I surprised? No, I am not. Then why am I writing?

Well, let’s quickly highlight coverage of this story provided by The Washington Post, New-Home Sales Plunge 33 Pct with Tax Credits Gone:

Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.

The bleak report from the Commerce Department is the first sign of how the end of federal tax credits could weigh on the nation’s housing market.

The credits expired April 30. That’s when a new-home buyer would have had to sign a contract to qualify.

“We fear that the appetite to buy a home has disappeared alongside the tax credit,” Paul Dales, U.S. economist with Capital Economics,” wrote in a note. “After all, unemployment remains high, job security is low and credit conditions are tight.”

New-home sales in May fell from April to a seasonally adjusted annual sales pace of 300,000, the government said Wednesday. That was the slowest sales pace on records dating back to 1963. And it’s the largest monthly drop on record. Sales have now sunk 78 percent from their peak in July 2005.

Analysts were startled by the depth of the sales drop.

“We all knew there would be a housing hangover from the expiration of the tax credit,” wrote Mike Larson, real estate and interest rate analyst at Weiss Research. “But this decline takes your breath away.”

When I read phrases such as, “lowest level on record,” “slowest sales pace on records dating back to 1963,” and “sales have sunk 78 per cent from the peak,” then a true measure of Sense on Cents dictates a commentary.

These numbers are certainly ugly. The prospects are not getting better. In fact, as painful as it to say, I firmly believe the attempts by Uncle Sam to prop the housing market ultimately only extend and exacerbate the pain. Why? The market does not have an opportunity to clear, meaning the supply is sold from weaker hands to stronger hands. This process is painful but it is reality and it is how markets operate.

I have made these points previously and maintain them again today.


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