Summer Sales Slump Reveals Housing Market Weakness

Analysts are now saying the housing market has not found a bottom as summer sales dwindle. Summer is typically the busiest season for the real estate market, but …

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Analysts are now saying the housing market has not found a bottom as summer sales dwindle. Summer is typically the busiest season for the real estate market, but economists believe a combination of high unemployment, low buyer confidence and tightened credit restrictions are keeping an estimated 40% of potential buyers out of the market. Given the persistence of the recession’s effects and an estimation that house sales would have to match those of 2002 at their peak to establish any traction for a recovery, it appears prices may fall even further before a recovery can begin. For more on this continue reading the following article from The Street.

Disappointing data on housing prices and home sales even in the supposedly busy summer selling season underscores the ugly truth that still-high unemployment is keeping potential buyers out of the real estate market.

Three main factors are contributing to housing woes, Anthony Sanders, senior scholar with the Mercatus Center at George Mason University, told TheStreet.

"First, credit is still very tight and about 40% of households have been flushed out of the housing market. Second, we are still in a low economic growth mode with 9.2% unemployment. Third, potential home buyers are like the proverbial ‘deer in the headlights’ because of job and economic uncertainty."

Sanders said that a high rate of joblessness remains the biggest challenge, and that the national unemployment rate must "get below 7% to really move the housing market," adding that "9.2% unemployment is death for a housing recovery, even at super low mortgage rates."

For a true housing recovery, "home sales have to be consistently at 2002 levels" and "house prices have to show six months of growth in the 0.5% to 1.0% range per month," Sanders ventured.

In the meantime, the S&P/Case-Shiller 20-city index of home prices fell 4.5% in May, according to data released Tuesday morning, worse than the 4.4% drop economists had expected, and the most significant fall since November 2009.

"Home prices have yet to find a bottom," John Herrmann, senior fixed-income strategist at State Street Global Markets, told Bloomberg. "Buyers are incredibly cautious," he added, echoing Sanders’ mention of unemployment and an uncertain economic outlook as further cause for would-be buyers to sit tight.

Sales of newly built homes fell 1% in June to a seasonally adjusted annualized rate of 312,000, a three-month low and the second consecutive monthly decline, the Commerce Department said Tuesday. Economists had expected the key monthly statistic to climb to 320,000 from 315,000.

"Even though confidence has shown some improvement, we are still at an utterly depressed level," RBC Capital Markets chief U.S. economist Tom Porcelli told the publication.

Sales of previously occupied homes also dropped last month, to the lowest level since 1997. Existing-home sales fell to an annualized rate of 4.77 million in June, the third consecutive monthly decline, the National Association of Realtors said earlier this month.

While the latest housing data surely paints a worrisome picture, Sanders cautioned that, "much like movements in the stock market on low volume, you have to be a little careful about over interpreting economic news on low volume. It’s when the volume returns that we see more relevant trends.

"Some economists were apparently shocked by the low sales volume. I wasn’t one of them. Tight credit and scared households (because of uncertainty about the economy and taxation) make for poor home sales," he added.

Investors in the homebuilding sector were downtrodden nonetheless on Tuesday.

The SPDR S&P Homebuilders(XHB) and iShares Dow Jones US Home Construction(ITB) exchange-traded funds that track the sector, fell 1% and 1.5%, respectively.

Among individual builders, PulteGroup(PHM) fell 0.3%, D.R. Horton(DHI) lost 1%, Toll Brothers(TOL) shed 1.4% and Lennar(LEN), widely considered a sector leader, was lower by 1.5%. Small-cap builders KB Home(KBH) and Hovnanian Enterprises(HOV) were also under pressure, by 0.6% and 4.2%, respectively.

This article was republished with permission from The Street.

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