Let me preface this piece by saying green shoots.
Existing home sales (which account for 90% of all transactions and hence far more important than tomorrow's new home sales) plunged to a sub 4M annualized rate, despite July traditionally being one of the best month's of the year for real estate. The year over year drop was 27.2%. This despite record low mortgage rates in mid 4% range and a governmental subprime lender who is now handing out 3.5% down FHA loans to almost anyone (they do not have a minimum FICO score requirement).
- The pace of existing home sales is the slowest since comparable records began in 1999. Purchases of single-family homes were the lowest since May 1995. (of course this does not adjust for population growth)
- The number of previously owned homes on the market rose 2.5 percent to 3.98 million. At the current sales pace, it would take 12.5 months to sell those houses, the highest since at least 1999 and compared with 8.9 months in June. The months’ supply of single-family homes at 11.9 months was the highest since 1983, the NAR said.
Many are confused why housing has not surged with these sort of interest rates. We now have record affordability (you can buy much more house at 4.6% versus 6.6% mortgages) - so where are the sales? I think the answer is clear - so few Americans that are not already home owners, have enough savings to actually be able to generate even a 3.5% down payment. Only when the government stepped in and created a 'tax credit' - that was morphed by many states into a de facto 'down payment replacement' were we able to create the marginal buyer. That's because when we create bubbles as we did in 2004-2007, we already brought forward all the organic buyers that should have been appearing in 2009-2010. Therefore, with a dearth of demand we needed (per government belief) to create new buyers and the only way to bring the 2011-2013 vintage of buyer forward a few years was to hand them taxpayer money in an almost no risk proposition (to them).
This is the same game that GM, Ford, and Chrylser did for a decade. How did that turn out again?
Long time readers will know the litany of issues; I've written about it in exhaustive manner.. The tax 'credit' (it was supposed to be credited on a tax return) was turned into a de facto down payment replacement by many states, and hence many who have no skin in the game now are new home owners on the backs of the taxpayers. (everyone on Wall Street applauded because it made home sales figures jump!) In due time I expect many of these people to default in 2012-2014. They have been handed a risk free poker piece in fact... they used the taxpayers money in lieu of down payment and get to live in a home and 'try it out'. If there is some big boom in prices they win. If home prices fall, they walk in 'strategic default' ... and get to live 'rent free' in said home (because truly they are renters, the term home ownership for what has been pulled off the past year is a joke) for 18-30 months before the banks get around to kicking them out. Of course by then the Congress and administration will try more desperate measures to keep people in homes so they most likely will be handed more tax money because 'the banks tricked them' into a mortgage.* This is the new America. Instead of stopping the bleeding and returning to some form of health in a few years from now, after the 2004-2007 vintage of home buyer went through the process, we have kicked the can down the road and created a new generation who we'll be paying for in the next cycle. Rinse. Wash. Repeat.
*of course all this taxpayer money given away to those duped by the banks into buying homes they could not afford is failing at a rate of 50%. [Mar 26, 2010: Half of US Home Modifications Default - Again] [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] And the latest data as of last week shows that half the people in HAMP have dropped out - most cannot prove their income. There is a reason it's called a liar loan - but I hope you enjoyed the taxpayer's money in the meantime.
As I wrote in piece after piece after piece in latter 2008 through this year... just try to imagine how bad the housing market would be with normal rates (say 6-6.5%), normal lender requirements for down payment (say 5%), and no bribery from government to buy homes. It is truly astonishing what numbers we see now considering the population growth.
I believe this is where I say 2nd derivative non improvement.