johnnymk

By MARTIN CRUTSINGER, AP Economics Writer


WASHINGTON - Sales of new homes plunged by the largest amount in nearly nine years in February while the median price of a new home dropped for the fourth straight month, providing fresh evidence that the nation's once-booming housing market is cooling off.

The Commerce Department reported that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes. It was the second straight monthly decline and was much bigger than the small 2 percent dip that Wall Street was expecting.

The drop in new home sales followed news Thursday that sales of previously owned homes actually rose by a stronger-than-expected 5.2 percent last month following five straight monthly declines. Analysts said the trend in both reports pointed to a slowing housing market after five record-setting years.

The slowdown in sales was putting pressure on prices. The median price of a new home sold last month dropped to $230,400, down by 1.6 percent from January and off 2.9 percent from February 2005. The median is the mid-point where half the homes sold for more and half for less.

The 10.5 percent drop in new home sales in February followed a 5.3 percent decline in January and was the biggest drop since a similar 10.5 percent fall in April 1997.

Sales of new homes have fallen in four of the past five months with the sales rate of 1.08 million units the slowest pace since May 2003.

While sales of both new and existing homes climbed to new all-time highs in 2005, the fifth consecutive annual records, analysts believe sales will decline this year as the housing boom slows under the impact of rising mortgage rates.

By sector of the country, sales fell by the largest amount last month in the West, a drop of 29.4 percent. Sales were also down in the South, dropping 6.4 percent. Sales rose in the Northeast by 12.7 percent while sales in the Midwest were up by 5.2 percent.

The slowdown in sales pushed the inventory of unsold homes up to a record of 548,000 at the end of February. At the February sales pace it would take 6.3 months to sell all of the homes on the market, up from 5.3 months in January.

Analysts believe that the growing backlog of unsold homes will start to put more pressure on home sellers to reduce prices in the months ahead.

Economists still believe that housing is likely to see a moderate slowdown this year rather than anything as severe as the bursting of the speculative bubble in stock prices at the beginning of this decade. That decline was severe enough, wiping out trillions of dollars in wealth, that it helped pushed the economy into a recession.

Itsme

My daughter is looking for a condo in the San Diego North County Inland area....seems like the downturn is good news for her...we already see more places on the market than before, and prices not as high as just last month.

Daedalus

Consider the real cost when buying a home. A $270,000 home loan that drops to $200,000 is not much of a bargain if interest rates rise from 5.25% to 8.25%. The payments in both cases would be almost identical on a 30-yr fixed. Consider that the average mortgage rate over the past 34 years is 9.4%, though I doubt we'll see that rate within the next few years at the very least.
It's looking like the fed is within 1/2 % of halting their overnight rate hikes. If long bonds remain in demand enough mortgages rates will continue to stay relatively cheap. Then cross your fingers (for buyers) that foreclosures rise and antsy/well-leveraged owners flood the exits with FSBO signs, causing a drop well below the mean. That would be a fantastic time to buy.

LegendKiller

A 25% drop ni prices are much more likely than a 57% increase in interest rates.

Using the past 30 years of IR to project the future isn't too valid, considering the monetary policies that were poor in the beginning of that time period.

Daedalus

I think you're right. Good for you.


I was discussing affordability, not the reasons behind it. The point was that the impact of rates on housing payments can be significant, but are not as obvious as changes in purchase price. Good lessons have been learned, policies are better and globalization has changed the financial landscape. And? Are you suggesting we won't ever see rates above 10% in the future?

Itsme

God help us if we were to see "Jimmy Carter" rates again.

Paniolo

Wonder if that will have any effect on the cost of 'rentals', in the S.D. area?

ramazank2

If payments were equal, I would rather have a lower priced home with higher interest for tax writeoff reasons.

Daedalus

For the same payments I would much rather have the house that was worth $75k more, vs. an extra ~$800 in my pocket in the first year, and less each year after. Maybe it's just me.

LegendKiller

The problem is, that house isn't worth 75k more after it goes down in value. More or less you are flipped on the mortgage.

I'd rather be able to sell on a dime and break even than owe the bank 75k more than the house is worth, even if I paid a higher IR.

At 5.25 and 25% tax bracket, your effective IR is 3.9375, at 8.25 it is 6.1875. Your 300bp inrease just decreased by 80bp and I owe less than you do, therefore the absolute interest payments are even lower over the life of that loan. That extra 75,000 is costing you $600/year.

In order for rates to be in the 10% area again, we would have to see inflation at double the rates we are experiencing today. If that happened, we'd probably be worrying about a lot more than prices of homes.

Also, long bonds, while remaining cheap, are not as cheap as they were before. Securitization has helped keep funds cheap, but that gravy train is ending. The market is saturated with Alt-A and B/C mortgages.

Another interesting note. There are reports released saying that a disproportionate amount of auto loans are now greater than 60mo, further indicating an over-extended market with negative equity loans leading.

Daedalus

A house is worth less if it drops in value: TRUE!

You're throwing in a condition that is beyond the point I was making. I think most people (myself inclued) understand it's bad to be highly leveraged on a depreciating asset; it's more a case of convincing them that the asset actually could depreciate. In that regard, we're already seeing hard evidence.

Individual situations will vary, and some poor folks live in high-tax states. At 25% tax rate the difference in taxes owed is $523.93 in the first year, all else being equal (275k@5.25% vs. 200k@8.25%, 360 months fixed). We could play with the numbers all day, but zeroing in on actual tax savings for this hypothetical situation wasn't the goal.

I'm sure homeowners would keep their single largest asset on their worry list. Bit of a difference between 8.25% and 10% but OK. I'm only saying it has happened. I'm guessing we'll see 8.25% again within a generation. We're less than 2% away on average!

cocojambo

will this lead to a decrease in prices? i really hope so!