From the Wall Street Journal:
Inventories of Homes Rise Sharply
By SUDEEP REDDY
August 28, 2007; Page A2
U.S. sales of existing homes fell slightly in July, but a surge in inventories set the stage for a steeper slump and sharper price declines in the months ahead.
After the credit crisis that hit financial markets this month, U.S. home sales are expected to drop further as tighter lending standards and a pullback by mortgage firms keep potential buyers on the sidelines.
Sharply rising inventories are a sign of homeowners trying to sell their homes before prices tumble more, said Joseph Brusuelas, chief U.S. economist at consulting firm IDEAglobal.
“There are going to be no happy endings here,” he added. “It’s the last days of the old order.”
Existing-home sales slipped 0.2% in July to a seasonally adjusted annual pace of 5.75 million homes, the lowest in five years, the National Association of Realtors said yesterday. The median sales price dropped to $228,900, down 0.6% from the July 2006 level, which was the highest on record.
Inventories of homes for sale jumped 5.1% to 4.59 million, or about 9.6 months of supply at the current sales pace. A supply of about six months generally indicates a balanced market.
The tightening of credit markets became most severe in mid-August. That means the full effect may not be seen until sales figures for September are released. The Realtor group’s figures reflect transaction closings, which mark the end of the buying process.
The problems may be most acute in the markets for lower-end homes, which tend to go to less credit-worthy borrowers, and for higher-end homes that require buyers to take out so-called jumbo loans. Rates for such loans, which exceed $417,000, jumped sharply this month.
Even before the market turmoil, inventories were expected to rise sharply into early next year as homeowners increasingly default on loans.
Sellers could face price declines of as much as 10% in the next six months as the market settles, said Joshua Shapiro, chief economist at consultancy MFR Inc. in New York.
“To sell cheaper homes, prices need to be slashed even more because demand is falling off,” Mr. Shapiro said. “If the bottom is falling out of the lower end of the market, it’s going to have to affect the middle, which affects everything above it.”