Sales and Inventories Jump in July


By Dean Baker

August 26, 2009

Moderate-priced homes in LA have lost almost 60 percent of their value since the bubble peak.

Existing home sales jumped 7.2 percent in July, reaching their highest level in more than a year. At the same time, the inventory of unsold homes rose by 280,000, a 7.3 percent increase.

This anomaly is easily explained by the fact that many potential sellers were holding their homes off the market; either renting them out, leaving them vacant, or deferring a move, until they saw signs that the market is improving. With the recent uptick in sales, these homeowners are now placing their homes on the market in increasing numbers.

Ironically, they may end up being victims of bad timing. There are two main factors that have propelled the recent upturn. The first was the extraordinarily low interest rates available in the spring, with 30-year fixed rate mortgages bottoming out near 4.7 percent. Rates are roughly half a percentage point higher at present and are likely to creep upward over the next year. While rates are still low by historic standards, they will certainly be higher than the rock-bottom rates available in April and May. (Given the lag between signing a contract and closing, many of the houses sold in July were contracted in May.)

The other big factor is the first-time homebuyers tax credit. This is scheduled to expire at the end of November. This credit has undoubtedly pulled forward the purchases of many first-time buyers. People who might have otherwise bought in 2010 or 2011 were no doubt motivated to buy this year to take advantage of the $8,000 credit. While Congress may extend the credit, there will almost certainly be a falloff in demand as the expiration date approaches regardless of what Congress does, since many potential first-time buyers will have already bought a home.

With the supply of homes for sale increasing in response to the perceived uptick in demand, and the demand dwindling due to higher interest rates, the expiration of the tax credit, and the steady growth in unemployment, it is likely that house prices will resume their decline some time later in the year. The downward pressure on prices is likely to be accentuated by the seasonal pattern of home buying. With sales falling off rapidly through the fall, if inventories remain high over the next two months, it is virtually certain that many sellers will be forced to sit on their homes through the winter, unless they are prepared to sharply lower their price.

The Case-Shiller Index showed a 0.7 percent increase in June, the first rise in the seasonally-adjusted data since May of 2006. Only 5 of the 20 cities showed price declines, with Las Vegas being the only big loser of the group, with a drop in its index of 2.9 percent. House prices in Las Vegas have fallen 32.0 percent over the last year and are down by 53.9 percent from their peak in January of 2007.

The tiered indexes show that the bottom third of the housing market continues to be the hardest hit in most metropolitan areas. In Los Angeles, the overall index rose by 0.4 percent, driven by a 0.5 percent increase in the index for the top tier of the housing market. While the middle tier was virtually flat, prices of homes in the bottom tier fell by 2.2 percent in June. They are now down by 26.6 percent for the year. Prices for homes in the bottom tier have fallen by 56.4 percent since their peak in February of 2007. It is likely that the prices of most homes in the Los Angeles area were still falling in this period, however because the index is weighted by price, and the price of high-end homes was rising, the index for the area as a whole increased in June.

It is likely that there will be two or three months of relatively good data in the housing market before the positive effect of the first-time buyers credit is exhausted. At that point, house sales are likely to slow substantially and there will be further price declines in many markets.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.