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Downward Pressure on Home Prices Mounts
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Downward Pressure on Home Prices Mounts
Luke Mullins

 

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The inventory of unsold existing homes rose nearly 5 percent in June from a year earlier

The tally of unsold homes on the market increased in June, a signal that real estate prices may face additional downward pressure in the coming months.

The inventory of unsold existing homes rose to just under 4 million in June, a nearly 5 percent increase from a year earlier, the National Association of Realtors said Thursday. The nearly 3 percent increase from May helped push the months supply of unsold homes at the current sales pace -- a key inventory yardstick -- to 8.9 from 8.3. Although that's down from 9.4 a year earlier, it's well above the six month supply typically associated with a balanced housing market.

Inventories grew as sales slipped 5 percent from the previous month, but remained 10 percent above year-earlier levels. But although the decline was less precipitous than economists had feared, it occurred even with the help of a key government stimulus.

The Obama administration offered tax credits worth up to $8,000 to qualified home buyers who signed a sales contract by April 30 and closed their transaction by the end of June. But as the real estate industry struggled to manage the surge in demand, the deadline to complete purchases was extended to September 30. Since existing home sales are counted at closing, June's figures reflect the tax credit's boost.

The tax credit's impact on the housing market should taper off before it expires at the end of September. Economists, however, expect sales to fall sharply before then. "The question is how much further will [home sales] drop before the payback period ends?" Patrick Newport, a U.S. economist for IHS Global Insight, said in a report. "The 30% plunge in May's Pending Home Sales Index; the recent drop in the MBA's Purchases Index to a 14 year low; and the fact that first-time home buyers accounted for 43% of all sales in June, and are likely to account for a much smaller fraction in July and August implies that a big drop in sales lies up ahead." Newport says home sales in July could fall 19 percent or more from June's levels.

[Check out Dirt-Cheap Mortgage Rates: Here for How Long?]

The rise in inventory and decline in sales didn't undercut home prices. The median existing home price in June increased 5 percent, to $183,700, from May and 1 percent from June of 2009. But economists expect prices to trend lower in the near future. "Pricing tends to lag other indicators when conditions head south," Mike Larson of Weiss Research said in a report. "Another bout of home price deterioration appears likely, though it'll be much more gradual than what we've seen to date."

Brad Hunter, chief economist at Metrostudy, expects home prices -- as measured by the S&P/Case-Shiller Home Price Indices -- to dip below their previous lows reached in the Spring of 2009 before hitting bottom in late 2011. "Sellers -- especially builders selling new homes -- are telling buyers, 'If you are worried about the $8,000 tax credit going away, we will discount [the home] by $8,000 more,' just to get the deal done," he says. Lower real estate prices, however, should work to increase the volume of transactions later this year, he says. And that, in turn, will help to mop up the glut of unsold homes.

 

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Downward Pressure on Home Prices Mounts

 

(c) 2010 U.S. News & World Report

 

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