First Drop in Housing Prices Since the Depression?

Housing prices dropped in 2007, marking the first annual drop in median existing home prices since the National Association of Realtors (NAR) began measuring that statistic in 1968, …

Housing prices dropped in 2007, marking the first annual drop in median existing home prices since the National Association of Realtors (NAR) began measuring that statistic in 1968, they reported Thursday. The median price of all existing homes sold fell to $218,900 in 2007, a 1.4 percent fall from the median price of $221,400 in 2006, according to NAR.

“Lawrence Yun, the Realtors’ chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s,” according to the Associated Press.

Total home sales dropped by 13 percent and single family home sales dropped by 12.8 percent, according to NAR.

Housing prices and sales fell in all regions of the country for 2007. Existing home sales in the South fell by only 1 percent from 2006 to 2007, according to NAR, while existing home sales in the Northeast fell 4.6 percent in the same time period.

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The drops in housing prices and sales are only part of the picture of the decline the housing market experienced last year. The credit crunch, decreased new home construction and fears of a looming recession also contributed to the lagging housing market.

“The new figures underscored the severity of the slump in housing, which has been battered for the past two years after enjoying a boom in which sales set records for five consecutive years,” according to the AP.

The housing market was predicted to experience a down year in 2008, too. “Falling property values and tougher borrowing rules may lead to more foreclosures and depress housing for most of this year,” according to Bloomberg.com. “The worsening real-estate recession is at the core of the economic slowdown and will probably prompt the Federal Reserve to lower interest rates [this] week and in future meetings, economists said.” The Fed lowered interest rates by 0.75 percent last week in the first emergency rate cut since 2001. (For more information on the Fed’s recent rate cut, see the Investor Centric blog post Fed Interest Rate Cut Unlikely to Make Borrowing Easier.)

The housing supply was also a critical problem for the housing market for two reasons: An oversupply eventually led to decreased new home construction.

“The number of homes for sale at the end of December fell 7.4 percent to 3.91 million. At the current sales pace, that represented 9.6 months’ supply, compared with 10.1 months in November. The Realtors’ group has said a five to six months’ supply is needed to stabilize the market,” according to Bloomberg.com.

“The Commerce Department reported [Jan. 17] that construction was started on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 percent plunge in 1980,” according to the AP.

Despite the housing price drop and other declining numbers, there does appear to be hope that the real estate market could see improvement. Less new home construction could actually be good news for investors who are trying to sell properties; as the supply diminishes, demand for existing properties will increase. (For more information, see the InvestorCentric blog post Housing Starts At An All Time Low: Good News Or Bad News?)

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