Tuesday’s housing numbers were bad. Surprisingly bad for many prognosticators. Seasonally adjusted existing home sales were down 27% nationally from June and 26% since last July. The new number of 3.83 million units in July from 5.26 million in June. Total sales are now at their lowest level since they began being measured in 1999. Single-family homes are at the lowest level since May of 1995. But back then the WSJ prime rate, a widely-used benchmark for setting mortgage rates, was 9%. Today it is 3.25% and holding.
The drop in sales was accompanied by a slight rise in prices: 0.7% since last year and only down a few hundred dollars since June. The Washington area saw an increase of 4% in home prices to a median of $351,100, the fourth-highest in the nation. This came is a local drop in sales of 18.4% on last year.
This inverse relationship is what we should naturally expect from a simple supply and demand model – increased prices reduce demand and sales drop. But the another important number in the report is housing inventory which increased 2.5% from June. That’s a 12.5 month supply at the current rate. June’s corresponding number was an 8.9 month supply.
How can prices be holding steady while supply is booming? A look at the numbers hints that we’re seeing an increasingly bifurcated housing market. Breaking the rates down by the price of the house yields a drop in every category – except homes costing more than $1 million. The number of these homes sold was up 6.1% on the year and they now represent 2% of the housing market.
In contrast the drop in sales for homes costing between $250K and $500K was 33% in the Northeast region. First-time home-buyers, who would tend to concentrate on the lower end of the market, were only 38% of buyers in July – down from 43% in June. So while most houses were sitting on the market, those which were selling were the ones at the very high end. The salable housing stock is moving upmarket. Those at the lower end who need to sell might be forced to drop prices soon in the face of collapsing demand and stiff competition. The result would be at least a temporary increase in price variance and a market divided into high and low ends with a hollowed-out middle. Bad news for those who bought into a lot of house, but just not quite enough.
The housing slump is deep and widespread, affecting almost the entire market – except for the small portion least likely to be feeling the recession’s worst effects. Another way of saying this is that things are looking up in the housing market as long as they weren’t that bad to begin with. It’s like the old joke about how to become a millionaire. First, you get a million dollars…