New Home Sales As Bad As Existing Homes

New home sales tumbled 26.4% last year, the largest yearly drop on record. Sales were down 4.7% in December, with median home prices dropping 10.4% year-over-year, the biggest 12-month decline in 37 years. These numbers don’t account for cancellations, so actual sales were probably even lower. Furthermore, I guess most sales featured additional incentives, so the prices are inflated, too. The median price of a new home increased a mere 0.2% to $246,900 in 2007 – if incentives were taken into consideration, new home prices would drop as well. The inventory of unsold homes is at 9.7 months’ worth, which is close to a record high, so there’s no light at the end of the tunnel for home builders. An economic stimulus package? Financial innovation, anyone?

Real Estate: Still Gloomy

Housing has been a source of concern for regulators, bankers and consumers for more than a year now, and signs of improvement are nowhere to be seen. According to the latest NAR report, existing home sales dropped 2.2% in December to a seasonally adjusted annual rate of 4.89 million units, compared to 5.00 million in November, down 22% year-over-year. Total existing home sales for 2007 came in at 5,652,000, down 12.8% when compared to 2006 results but still the fifth highest level on record. The inventory of unsold homes currently on the market is more than twice the normal supply. The December level was the highest in history for that month. The median price for a single-family home dropped 1.8% in 2007, the first decline since the NAR started tracking prices in 1968. Looks like it can only get better from now on but who knows, so many problems need to be solved first.

By the way, the latest Fed rate cut has helped bring down mortgage interest rates: on average, the 30-year fixed home loan carried an interest of 5.48% this week, the lowest level in almost 4 years. It stood at 5.69% last week. 15-year fixed-rate mortgages dropped to 4.95%, from 5.21% last week, 5-year adjustable-rate home loans averaged 5.13%, compared to 5.40% a week ago, and one-year ARMs stood at 4.99% this week, compared to 5.26% last week. Lenders are expecting a refinancing boom.

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.

The Perfect Storm

Housing starts dropped 14% in December to an annual rate of 1.006 million, the lowest pace since 1991. Construction fell 25% in 2007, its biggest drop since 1980. Permits dropped to 8.1% in December, and 25% for the entire 2007, the biggest decline since 1974. Construction of single-family homes dropped 2.9%, and multifamily homes dropped 40%. Homebuilders are scaling down construction while they wait for the surplus inventory on the market to sell. Well at least there’s some hope that that will happen. Mortgage rates continued to drop this week, 30-year fixed-rate mortgages averaging 5.69%, the lowest in more than 2 years. 15-year fixed-rate mortgages averaged 5.21%, down from 5.43% last week. 5-year hybrid ARMs carried an interest of 5.40%, compared to 5.63% last week. 1-year adjustable home loans fell from 5.37% to 5.26%. Unfortunately, banks are reluctant to lend money to borrowers. Weak retail sales in December, which dropped 0.4% from the previous month, would suggest that consumers are feeling strapped and unlikely to start house-hunting just yet. This looks like a perfect storm for the economy, and we’ve run out of ideas – and financial innovation.

Banks Tighten Credit

The Fed’s efforts to add liquidity to the markets are being offset by banks such as Citi, which announced that it will be raising interest rates and reducing consumer lending. Mortgage lending and credit cards will also be trimmed. Lending, to anyone, in any form, is too risky right now, and while the market is trying to deal with the mortgage and mortgage-derivatives mess, there’s fear that other areas of the financial system may fail as well: credit card lending, commercial Real Estate loans, and the list goes on. To help revive the economy, the Fed will probably cut rates again at the end of January (or, as some like to believe, perhaps sooner), but maybe a serious crunch is what the economy really needs after all. Short term, tighter credit will only extend the crisis in housing, because home buyers won’t be able to secure financing. No wonder the immense inventory of unsold homes (currently above 10 months’ worth) is not moving and home builders are struggling. With or without the Fed’s help, housing will take years to get back to normal, as consumers learn to save, budget and prioritize expenses.

Single-Family Home Building Declines

Spending on private residential construction dropped 2.5% in November, its biggest decline in 5 years. This was the 21^st consecutive drop in home construction, which illustrates a slowing trend for private home building. Non-residential building, however, showed an increase of 2.1%, which offset the drop in residential construction. Total construction spending increased by 0.1% in November. Meanwhile, the Institute of Supply Management’s manufacturing index dropped from 50.8 to 47.7. Any number below 50 indicates contraction in manufacturing. Stalling home building and manufacturing will most likely lead to slower economic growth and affect the overall GDP. These results are closely related to the higher cost of credit and the problems in the housing sector, both of which result in lower consumer spending. What we get next is either (or maybe even both) of the following: another rate cut or recession.

Building Permits, Construction Drops

A report by the Commerce Department says that construction of new homes dropped 5.5% in November to the lowest level in 16 years. Applications for building permits fell 1.5% to the lowest level since 1993. Meanwhile, construction of multi-family homes increased 4.4%. The builder sentiment index remained at 19 in December for a third straight month, the lowest reading in more than two decades. And now the question is, can it really get any worse? Naturally, builders are worried: after all the Real Estate speculation, those who got burned no longer have the finances or credit rating to buy a new home. As an interesting aside, a survey by Countrywide Bank showed that getting financially fit is the top New Year’s resolution this year. Physical fitness comes second - households consider sound finances more important than healthy bodies.

Analyst Downgrades Lennar

Deutsche Bank Securities Inc. analyst Nishu Sood cut his rating on Lennar Corp. from “Buy” to “Hold”, citing concern over the home builder’s joint-venture agreements. Tighter credit and a glut of homes on the market have resulted in declining demand and a high rate of cancellations, which eat into home builders’ bottom lines. Sood cut his target price for Lennar stock from $36 to $17. The stock traded at $18.72 on Thursday.

Home builders and sellers, desperate to sell homes, are offering ever bigger incentives, ranging from trips and car leases to exotic pets. Sellers are willing to make deep discounts because they fear that home prices may fall further as forecast. However, the market is so bad right now that the chances to sell a home at all are really slim. And while most owners can afford to sit and wait for better times to sell their houses, home builders are suffering losses every day a new home sits empty.

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

Mortgage interest rates edge down as worries over inflation ease

According to mortgage giant Freddie Mac, rates on 30-year fixed-rate mortgages dropped to 6.63%, down from last week’s reading of 6.67. Frank Nothaft, Freddie Mac’s chief economist, said the drop in interest is in part due to “a moderation in core inflation”. 15-year fixed rate mortgages averaged 6.30%, down from 6.34 last week, while five-year adjustable home loans stood at 6.29, compared to 6.30 a week earlier. One-year adjustable mortgages rose to 5.71%, up from 5.65 a week ago.

Mortgage applications showed a slight increase last week, according to the Mortgage Bankers Association. The mortgage application index was up 0.1%, as refinancing dropped 2.6% while purchase applications increased 2.0%. Not really a great summer home-buying season.

Builders: focusing on affordability

As the housing slump keeps getting more severe, builders are looking for new ways to attract clients. Price discounts and free upgrades didn’t do much to reduce inventories, so now builders are concentrating on more affordable, smaller housing units.

During the housing boom, the average size of a home increased – along with its price – as many buyers attempted to purchase as much house as possible. In recent years many have come to realize that the house they live in doesn’t have to be a huge and expensive one to provide comfort and a sense of homeliness. While demand for housing grew, builders would construct larger houses and sell them at higher prices, but now that affordability has really become an issue, 1,000 – 1,600 sq. feet homes are back in fashion.

KB Home, one of the largest home builders which suffered a second-quarter loss of $148.7 million, is trying to revive the market by offering a line of smaller homes. D.R. Horton is also downsizing, providing more affordable options for buyers. Builders are generally better motivated to unload homes than other sellers on the market, because unsold homes incur significant losses as they stay unoccupied.

Well, apparently it takes a housing slump as severe as the current one to make buyers, builders, agents, lenders and investors apply some common sense when making financial decisions. Better late than never, after all.

Foreclosures jumped 90% in May

Home foreclosures increased 90% from a year earlier in May, according to RealtyTrac data. The total of 176,137 foreclosures was 19% higher than the April number. Economists fear that the rate of foreclosures will accelerate in the coming months, which will pour additional homes on the already glutted market, all this amidst what turned out to be a not-so-robust-at-all spring/summer buying season. Such a scenario spells serious trouble for home builders, many of which are experiencing financial difficulties and even closing doors.

On average, there was 1 foreclosure for every 656 U.S. households in May, the highest total filings being in California, Florida, Ohio, Texas, Michigan and Georgia. Home prices, however, have not yet seen sharp drops. They have declined somewhat, but not enough to lure large numbers of buyers to the market. With less cash in their homes and less credit available, consumers hesitate to purchase Real Estate now.

After the real estate market surge, new rates arrive.

According to Freddie Mac, a leading mortgage agency, the interest rates have risen slightly, after the increased sales and mortgage activity in the first 2 weeks of January.

With home prices and fixed-rate mortgages at near-record lows, the real estate environment benefits home buyers. Refinancing activity has been on the rise as well, with consumers changing from adjustable to fixed rate mortgages and consolidating debt after the holidays. Now, the market reacts with the 30-year fixed-rate mortgages, 15-year mortgages and hybrid ARMs raising a fraction as compared to the previous week.

The increased home buying activity is in part due to high employment numbers and low prices. Contrary to expectations, purchasing activity started going down during the second week of 2007, after the rise in the beginning of January. Home prices are likely to rise soon, with the spring home buying season approaching and the market waking up after last year’s lows.

The rising trend for ARMs may continue in 2007, making fixed-rate mortgages even more attractive for borrowers and stimulating refinancing. However, some researchers predict cuts after last year’s consecutive hikes, so ARMs may yet offer surprises.