House Hunters Are Bargain Hunters

 | Oct 26, 2011 | 2:00 PM EDT
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We now have a number of recent data points that tell us where we are in the housing market.

New home sales advanced 5.7% from August to September to a 313,000 annual rate, though they are still 0.9% below last year's level. It was the best showing in five months.

The month's supply metric, which I find most valuable and measures inventory for sale relative to sales, is now at 6.2 months. Many economists believe this represents a relatively stable market. It's also an improvement from 6.6 months in August and 7.7 months a year ago.

But buyers seemed to be lured by discounts. The median price of a new house decreased by 10% to $204,400 in September from $228,000 in the same month last year. The percentage drop was the biggest since April 2009.

Existing home sales had less of a price drop and sales fell in September, down 3.0% to a 4.91 million annual rate. Prices fell, including a 3.5% decline for the median to $165,400 and a 3.1% decline for the average to $212,700, for year-over-year comparisons. Supply on the market at the current sales rate inched higher, to 8.5 months from 8.4 months, which is a bit elevated relative to a healthy market of about six month's supply. 

It seems buyers can be lured by attractive price points, and, by itself, that data suggest that prices may need to fall further in order clear the inventory, especially given the competing price points of foreclosures on the market.  That can further exacerbate declines in wealth and increase delinquencies and defaults.

But in order to reach a level at which sales will increase, prices may need to adjust to a level at which buyers will feel comfortable to making a commitment to buy a home. Homebuilders may approach pricing more objectively than homeowners, who may approach pricing with a bit more emotional criteria. So, existing home prices may be slower to adjust downward than new home sales might.

Right now, prices as measured by the Case-Shiller Home Price Index show stabilization. A gauge of home prices of 20 major cities showed that prices rose 0.2% in August, but were still down 3.8% year over year. The month-to-month stabilization in prices is small, but encouraging. But it isn't being accompanied by rising sales of existing homes in the past month.

Do the new home sales data and the bit of an uptick in prices per the Case-Shiller data show the beginning of a sustained improvement in housing? 

The latest Consumer Confidence report showed that the number of people who plan to buy a home within six months dropped to 3.9% from 4.7%, amid extremely weak consumer feelings overall.

Perhaps desperate – I'll use that word -- to increase housing sales, some Fed officials, including Vice Chairman Janet Yellen and Governor Daniel Tarullo, have recently suggested that a further round of mortgage buying by the Fed might be warranted. The goal is to reduce mortgage rates to entice people to buy a home.

But while a lower mortgage may make the monthly payments more affordable, it isn't going to change the fact that some would-be homebuyers won't be enticed to buy a home until the price is low enough, such that they expect that future appreciation in the value of the home will offset the mortgage interest and other homeownership costs. Additionally, homes may be very affordable relative to history, but the expected appreciation of a home is perhaps highly uncertain in the minds of would-be buyers, and they may expect lower prices in order to compensate for that risk. Mortgage rates might not be a big a factor in that equation.

Also, lower mortgage rates may prompt a greater demand for mortgages, but will banks be willing to lend at lower rates, which would offer less of a spread vs. Treasuries and be less profitable for the bank and offer less of a cushion to absorb defaults? Any further intervention by the Fed into the mortgage market may distort rates, leading to a supply-and-demand imbalance for loans that might not lead to greater mortgage lending if banks feel they are not being compensated for their risks. 

Some of the problems in the housing market are best left to the free market to resolve, but with some programs to help homeowners become more financially stable to aid consumer spending and help prevent those defaults, that might be avoidable. Unfortunately that may mean lower prices, particularly of existing homes, to clear the market.

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