Housing Drags Along

Don Hogsett, July 9, 2007

The broad U.S. housing market continued to recede during May, with all three segments heading south, taking housing prices down as well.

Sales of existing homes, the largest housing sector, accounting for more than 70% of all activity, almost held their own, slipping just 0.3%, to a seasonally adjusted level of 6.0 million units. But sales of pricey new homes fell by 1.6%, to 915,000 units, making home builders antsy. And they responded by cutting back, pushing housing starts down by 2.1%, to 1.5 million units.

"Psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for sub-prime borrowers," said Lawrence Yun, senior economist for the National Association of Realtors. "Household formation has slowed dramatically since late 2006, implying that many people are doubling up — they're adding roommates or moving in with parents."

The housing market, said Yun, "is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates, and flat home prices."

Housing prices kept falling: the median price for an existing home fell 2.1% from year-before levels, to $223.700 from $228,500.

New home sales were down by 15.8% from a 13-month high of 1.1 million units last May, the Commerce Department reported. "The gradual decline in new home sales is still underway, and we expect this trend to continue as the market approaches the bottom," said David Seiders, chief economist of the National Association of Home Builders (NAHB). "We expect home sales to stabilize before the end of the year, followed by a systematic multi-year recovery beginning in 2008."

Builders are breaking ground on fewer new homes. Housing starts fell to a seasonally adjusted level of 1.5 million units. Starts have plunged by 24.2% over the past year, from a level of 1.9 million units in May 2006.

Builder confidence fell once again in May, plunging to its lowest level since February 1991, according to NAHB and Wells Fargo Bank. Confidence fell to a level of 28 from 30 the month before.

"Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of non-price incentives to work down sizeable inventory positions," said Brian Catalde, NAHB president.

"It's clear that the crisis in the sub-prime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates," added Seiders.

Month-To-Month % Change, May 2007

Source: U.S. Department of Commerce and National Association of Realtors
Northeast 5.8% 15.7% -11.0%
Midwest 0.7 15.5 30.8
South -3.4 -1.6 -7.3
West -0.8 -19.7 -1.9

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