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Home Prices: What Matters Most

Written by Gary North on June 26, 2012

The good news is that new home sales have bottomed — just so long as there is o recession in 2013.

Problem: there is probably going to be a recession in 2013.

Mortgage rates for a 30-year home are under 4%. This is good for now. But when rates move up to historic levels, as they will, the number of qualified borrowers will fall. Demand will fall. Prices will be hit again.

Home sales rise in summer. So do sales prices. Headlines are positive. Then prices and sales fall in winter.

So, what matters most?

The Calculated Risk blog site rand a good article on this recently. Conclusion: what matters most are these statistics: (1) the supply of unsold homes (inventory); (2) the percentage of distressed sales.

In both areas, the news is mildly better, but not enough to announce “recovery.”

New home sales are up 35% from the low, and about one-quarter from the May 2010-September 2011 average.

Some people think housing will recover rapidly to the 1.2+ million rate we saw in 2004 and 2005.  I think that is incorrect for two reasons.  First, I think the recovery will be sluggish – 2012 will probably be the third worst year ever.  Second, the 1.2 million in annual sales was due to an increasing homeownership rate and speculative buying.  With a stable homeownerhip rate, and little speculative buying, sales will probably only rise to around 800 thousand at full recovery.

There is a gap between new home sales and used home sales.  This gap refuses to go away. It is a sign of unsold homes (inventory). The market refuses to clear. This keeps downward pressure on the sale of existing homes.

Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven’t been able to compete with the low prices of all the foreclosed properties.

This gap will eventually close, but it will probably take a number of years.

Continue Reading on www.calculatedriskblog.com

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