This is not quite the headline in today's WSJ, but a quick look at the numbers buried in the article show some stunning trends:
WASHINGTON -- New-home sales soared in April, an unexpected surge marking the biggest climb in 14 years, according to a report that showed declining inventories and signaled hope for the long-suffering housing sector.
This title and lede probably deserve a prize for "most misleading journalism"...
... because the article says this:
Sales of single-family homes increased for the first time in four months, rising by 16% to a seasonally adjusted annual rate of 981,000, the Commerce Department said Thursday. March new-home sales decreased 1.4% to an annual rate to 844,000, a figure revised down from an earlier estimated 858,000. Sales fell 3.8% in February and 13% in January. Year-to-year, new-home sales were 11% lower than the level in April 2006.
i.e. this is just a temporary upward blip in a long downward trend, and sales this April were quite a bit lower than one year ago, a comparison that provides as much, if not more, information than the monthly variations.
But the ncomes the real meat of the article:
The average price of a home last month decreased to $299,100, down from $324,700 in March and $310,300 in April 2006. The median price was $229,100, lower than $257,600 in March and $257,000 in April 2006.
So, average prices are down 8% (on both last month and on a year ago) and median prices are down 11% (on both last month and on a year ago).
Average prices can be distorted by transactions on the high end of the market (which is still buoyant as Wall Street and big corporations rake in record profits and top traders and managers have never had it so good), but median prices (i.e. the prices at which 50% of transactions were at a higher price, and 50% at a lower price) going down means that the whole market is going down.
And median prices going down more than average prices suggests that transactions at the top are hiding even worse declines elsewhere.
So, a big drop in prices. Is it just a blip? Could be. But what makes it worrying is actually precisely what the WSJ spins as positive news: the growing volumes. This means, in fact, that more people are accepting the reality of lower prices when selling, and make is unlikely that the trend will change.
The typical cycle in a house bubble is that transactions first freeze as buyers become unwilling or unable to pay the high market prices. Sellers first refuse to change their requirements, and, as the market slows down, will rather wait than lower their price. Thus the number of transactions will go down before the prices. It is only when people start being forced to sell that prices actually go down, as they need to bring down prices to actually sell. Then transaction numbers will pick up as prices accelerate their downward move. Then transactions will slow down again as prices reach their bottom, with few buyers and few sellers (only those forced to that did not do it previously). As the market regains its footing, both prices and number of transactions will finally start increasing again.
What is uncertain is what kind of an impact the housing slump will have on the economy. There are two ways it could be nasty:
- the wealth effect: people no longer can withdraw equity from their houses to pay for spending. Thus consumptions drops;
- the jobs effect: with so many jobs of the jobs created lately being in construction - and the financing of real estate - in recent years, it is likely that a number of them will disappear, and thus push up unemployment rates.
Both of these will further depress the housing market, and may put a number of people in dire financial straits, especially if they have one of the more exotic loans that were offered in the past 3 years.
Bur hey, the number of transactions increased! all is well!