April 24, 2007

Real estate market hits BIG pothole

Month-to-month existing-home sales hit a nearly 20-year rate of decline in March, as the subprime mortgage crisis continues to metastasize.

How bad was it?
The National Association of Realtors reported that sales of existing homes fell by 8.4 percent in March, compared with February. It was the biggest one-month decline since a 12.6 percent drop in January 1989, another period of recession conditions in housing. The drop left sales in March at a seasonally adjusted annual rate of 6.12 million units, the slowest pace since June 2003.

The steep sales decline was accompanied by an eighth straight fall in median home prices, the longest such period of falling prices on record. The median price fell to $217,000, a drop of 0.3 percent from the price a year ago.

The fall in sales in March was bigger than had been expected and it dashed hopes that housing was beginning to mount a recovery after last year's big slump. That slowdown occurred after five years in which sales of both existing and new homes had set records.

The eighth-straight monthly fall isn’t just existing homes… that’s ALL home prices, too.

Basically, new home prices are cratering because of a variety of factors:
• The subprime loans are going bye-bye
• Many people in that market range can’t afford other loans
• The amount of “bubbling” from speculative and “investment” new home buying has started to burst
• Inventory of new homes has mounted up.

So, new-home prices have sunk enough to put pressure on existing-home sales. But, even with that pushing prices down, many buyers probably expect new home prices to fall even further, and so are going to sit and wait.

That, in turn, will push existing-home prices down yet more.

In other words, the residential real estate market faces the serious possibility of a growing vicious circle for at least several months.

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