Merrill: Housing Prices To Drop 15% This Year

Analysts at Merrill Lynch predict that Real Estate prices will fall 15% in 2008, and continue to slide in 2009. The NAR disagrees: in their rosy outlook, prices will be flat this year, with a 5.3% drop in the first quarter and a rebound in the second half of the year. According to Merrill Lynch, housing starts will drop 30% by the end of the year – a likely scenario that doesn’t bode well for home builders. “The reduction in housing starts is not stabilizing the economy, but it will stabilize the market”, said the NAR’s Lawrence Yun – at least he got this one right. The Fed’s rate cut will probably help sales, but it is unlikely to change the situation dramatically. Rather, 2008 will be just as bad for homebuilders as 2007. There’s little hope for a successful spring buying season, although lower interest rates and dropping prices could lure buyers to the market. Much will depend on consumer confidence and commodity prices in coming months. If the slowdown is more severe than expected and unemployment keeps growing at the same pace, many potential buyers may choose to delay a home purchase.

As The Year Ends

2007 is drawing to its end, and between holiday shopping and baking cookies, some are trying to analyze the housing market trends and forecast its future behavior. While predictions range from mildly gloomy to disastrous, the NAR produced an amusingly optimistic home sales forecast for 2008. After reducing their home sales forecasts for 9 straight months, they now revised their 2007 forecast upwards, to 5.67 million from 5.66 million. Chief economist Lawrence Yun said an optimistic job market report and the government’s help for troubled homeowners influenced the improved outlook. The group believes home sales will rise to 5.7 million in 2008. A Global Insight economist forecasts 4.7 million home sales in 2008.

Merrill Lynch predicts a gloomy 2008 for the U.S. economy with high energy prices, weak employment, tight credit and falling home prices. And by the way, Fannie Mae and Freddie Mac are introducing tougher requirements for mortgages they securitize.

Home Sales Dropped in 3Q

Sales of existing homes declined in 46 states in the third quarter of 2007, according to an NAR [National Association of Realtors] report issued Wednesday. Sales dropped 13.7% on average year-over-year, while Nevada, Florida, Arizona and California were hit hardest, with declines of 35%, 32%, 30.9% and 27.8% respectively. Sales increased in Vermont and North Dakota – the only two states to report positive data. Sales were up 0.8% in Vermont and 2.9% in North Dakota, and no sales figures were available for Idaho and New Hampshire.

As for metropolitan areas, 93 out of 150 surveyed saw price increases. However, median prices in Florida and California dropped more than 10% compared to last year. In his statement, NAR’s chief economist Lawrence Yun emphasized the positive news: “Some metro areas are hot while others are experiencing localized problems”. So all Real Estate is local, and the problems are “localized”. And there’s more of the “all is well” rhetoric: “Home prices … are affordable and, perhaps, even undervalued” – I guess foreclosure properties are indeed undervalued.

Home Sales slide in September

Now that the data is in, we can say that September sales did indeed drop dramatically. Total existing home sales fell 8% to a seasonally adjusted rate of 5.04 million units, compared to 5.48 million (revised downwards from 5.5 million) in August. That is more than 19% less than a year ago, when 6.23 million units were sold. Third-quarter numbers, however, were better than expected, with an annual sales rate of 5.42 million, somewhat higher than the NAR’s forecast of 5.38 million (unless numbers get revised again).

We now have a 10-month supply of homes on the market and it seems unlikely that this surplus inventory will be sold before the end of the year. As usual, Lawrence Yun, NAR’s senior economist, provided some comment, which I will not quote, because it is more of the same “all is good talk”, as usually wrapped in shiny complicated terminology that failed to conceal the underlying emptiness. Here’s a link to the press release for anyone interested.

Home Sales Dropped In August

Home sales fell for the sixth month in a row in August, with a remarkable 12.8% year-over year drop. The seasonally adjusted annual sales rate was 5.5 million, the lowest figure since August 2002. Economists believe that August sales data does not fully reflect the consequences of the credit crunch experienced by financial markets, so September figures could be even worse. In this context, NAR’s Lawrence Yun did his best to lighten up the mood: “Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize”. Thanks, that was funny, you’ll find more on realtor.org. There’s a record 10-month supply of unsold homes on the market, and that is not going away before the end of the year. Analysts are saying that sales will not stabilize until mid-2008, and some believe even that is optimistic.

Amid the turmoil, home builders are feeling the pain, too. Home builder Lennar Corp. reported the biggest quarterly loss in its history, $513.9 million, or $3.25 a share. This was unexpected, because the lowest estimation predicted a loss of $1.21 a share.

Home sales dropped in 2Q

The National Association of Realtors (also known as the infamous NAR) reported that existing home sales fell 10.8% in the second quarter of 2007. Homes sold at an annualized rate of 5.91 million, down from last year’s 6.63 million. The median home price dropped 1.5% to $223,800. However, amid all the news, NAR officials saw reasons for confidence: median prices are going up in 97 metro areas, as compared to 83 in the first quarter. Lawrence Yun, senior economist for the NAR, said that “Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends”. He also didn’t fail to mention that “Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming-out in the fourth quarter of 2006”. So the market bottomed out in 4Q after all? Let’s hope he’s right. I thought we’d all seen evidence to the contrary.

Pending home sales dropped in May

Data released by the National Association of Realtors (NAR) points that pending sales of existing homes dropped to the lowest level in 6 years in May. The index declined 3.5% to a reading of 97.7, following declines in the previous two months. A year ago, it stood at 112.7. A reading of 100 represents the average contract activity in 2001.

Pending sales are purchases in which the contract has been signed, but the deal has not been closed yet. Thus, the index is considered a near-term indicator of future market activity, and consecutive monthly declines could only mean that home buying isn’t picking up any time soon. The index declined in the South and Midwest, and grew in the West and Northeast.

NAR’s senior economist Lawrence Yun said that “some transactions are being postponed” due to market disruptions. He didn’t mention, however, how long he expects buyers to keep “postponing” purchases.

Mortgage loan applications slip

Mortgage loan applications declined 1.7% last week. The Mortgage Bankers Association reported a 6.1% drop in the Refinance Index from the previous week, and a 1.5% increase in the Purchase Index. This is somewhat surprising, as analysts believe that more and more homeowners who took out adjustable-rate mortgages in recent years should be refinancing.

Meanwhile, the National Association of Realtors (NAR) released an interesting statement. “Home sales are projected to move in a relatively narrow range with a gradual upturn” toward the end of the year, nothing new here. According to senior economist Lawrence Yun, “Overall housing levels are historically strong”, whatever that is supposed to mean, “but sales remain sluggish”. To me, this sounds like trying to make bad news seem good. Nothing new… He goes on to say that, because fewer high-cost homes are being purchased, the median existing-home price is being distorted, meaning that home prices are actually moving upwards, contrary to statistical data. He cites Freddie Mac’s price index as a more reliable source of information, showing that prices are actually rising, not dropping. Indeed, prices have increased somewhat in the first quarter of 2007 compared to the final 3 months of 2006, but the growth rate is only a fraction of what it was a year ago. “House price appreciation did not keep pace with the overall level of inflation during the quarter”, says Freddie Mac’s Frank Nothaft. He also added that national home price growth will probably slow down even more and price declines are expected “in many parts of the U.S.”.

Yun believes that “buyers today need to have a traditional view that housing as a long-term investment is an added benefit”. Nothing new here either, but it seems most buyers are still waiting on the sidelines for better prices and interest rates. Will a public statement from a trade group official make them change their minds?

NAR’s “U.S. Economic Outlook” forecasts price declines for both existing and new homes for the rest of the year, and predicts a 6.6% 30-year mortgage rate for Q3 and Q4. All this sounds a little saner than Lawrence Yun’s allegations, but who knows, the forecast might be amended anytime.

Pending Home Sales Index drops

The National Association of Realtors (NAR) announced that its Pending Home Sales Index dropped 3.2% in April from a month earlier. The index measures home purchases in which the contract has been signed but the transaction is not yet closed. It is considered a forward-looking indicator of market activity. In both March and April, the pending home index was approximately 10% lower than last year’s readings.

This drop is somewhat unexpected, because forecasts predicted a 0.4% increase. Lawrence Yun, a senior economist with the NAR, said sales of existing homes “might ease but should be fairly stable in the months ahead”. Hm… The index was in fact much lower than expected, is that a sign of improvement? Not in the real world, I think. According to some predictions, it may take several years for the housing market to stabilize, so expecting a “quick rebound” in the coming months is somewhat unrealistic. A rosy picture from the NAR again? Perhaps…