Declining House Sales Indicate Slowing Economy
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SPENCER MICHELS, NewsHour Correspondent: The growing number of “For Sale” signs that are going up and staying up in many neighborhoods across the country is one indication that the once-booming housing market is beginning to slow down.
The National Association of Realtors reported that sales of previously-owned homes dropped 4 percent between June and July of this year to the lowest level in two-and-a-half years. That contributed to a new record-high inventory of homes on the market, now nearly four million.
Lower or stagnant selling prices are another indication of a weaker market. The median price of a home last month was up less than 1 percent compared to the same time a year ago, to $230,000, the smallest increase since 1995. That’s a sharp contrast from recent years when the median price of a home shot up by nearly 60 percent since 2000.
REAL ESTATE AGENT: To put a new microwave in…
SPENCER MICHELS: Like many sellers, Harry and Glenna Heckathorn of Arlington, Virginia — recently one of the nation’s hottest realty markets — were caught off-guard when they tried to sell their four-bedroom house for $969,000 in May.
GLENNA HECKATHORN, Home Seller: About, oh, four or five weeks after that, we dropped the price to $929,000. And then it wasn’t really a week later that we dropped it to $925,000. And still, the open houses were generating a lot of interest. We had a lot of people. They said nice things about the house. They didn’t seem to think the price was unreasonable, but still there were no offers.
HARRY HECKATHORN, Home Seller: The market is slow right now. Last year, we would have sold this house in about a week to two weeks time, probably pretty close to the asking price.
SPENCER MICHELS: The Heckathorns also threw in two Vespa scooters as an added incentive for buyers.
The slowdown is not limited to existing homes. The latest figures on new home sales will be released tomorrow, and economists are predicting they will also decline.
GWEN IFILL: Now we get some analysis of what's happening in the housing market and its impact on the larger economy. Lawrence Yun is a senior economist at the National Association of Realtors, and Steve Cochrane is the senior managing director at Moody's Economy.com, an Internet site for economic and industry analysis.
Lawrence Yun, did somebody flip a switch? This was a hot market. It was supposed to be a hot market forever. What happened?
LAWRENCE YUN, Senior Economist, National Association of Realtors: Well, the market is transitioning. We had a frenzied level of activity in 2005. That cannot be sustained. So as the mortgage rate began to rise, now we are seeing the buyers pulling back. At the same time, sellers aren't in a rush to sell. So we have a situation where there's a little too much supply, lack of demand, so the prices are now beginning to level off.
GWEN IFILL: You say it's the mortgage rates are to blame?
LAWRENCE YUN: The mortgage rates are roughly 1 percentage point higher today compared to a year ago. And many coastal markets, the home buyers had to stretch into interest-only, adjustable. And in the overstretch markets, when the rates begin to rise, it begins to squeeze, and it's the coastal market that we are seeing the greatest transition.
GWEN IFILL: Steve Cochrane, I remember when we were talking about double digits when we talked about interest rates. We're not there at that yet, so what do you think is the reason?
STEVE COCHRANE, Senior Managing Director, Moody's Economy.com: We're not near that at all, but the rise in interest rates is one factor that is causing the market to falter.
The other is simply the lack of affordability. That house prices have gone up so high over the last two years relative to household income growth that it doesn't take that much of a rise in mortgage interest rates to get that affordability beyond reach for so many households, particularly for lower-income households, first-time buyers, those that are using adjustable-rate mortgage products to get into the market because short-term rates have risen much faster than the long-term interest rates. So first-time buyers are getting squeezed.
GWEN IFILL: Steve Cochrane, is this happening across the board around the country? We just saw what's happening here in suburban Washington, obviously, California, Boston, other hot markets that we've noticed for the past couple of years. Is this slowdown happening across the board?
STEVE COCHRANE: It is happening across the board. We saw it in the data that came out today on home sales. Really, the only strength in the housing market right now seems to be the stretch in the south, say, from the larger Texas metropolitan areas over towards the southeast, towards Atlanta.
These are areas where markets have not been frothy over the last couple of years and where affordability still remains pretty good and the economy is doing pretty well in those areas, that in contrast to, say, Midwestern markets where the housing markets haven't been too frothy, but the economy is also, particularly in some of the auto assembly areas where there's a high exposure to the auto industry and lay-offs related to that industry, that things are soft.
Piercing the housing bubble
GWEN IFILL: Lawrence Yun, is this the piercing of the bubble we've been hearing so much about, or is it just air being let out and so it's a -- I guess, is a hard landing we're looking at or a soft one?
LAWRENCE YUN: The transition so far would suggest that it is a soft landing. And also, the market that is seeing a significant decline in sales activity -- Florida, Washington, D.C., region, California -- there's a very strong, robust job creation.
So essentially we have strong job gains, at the same time sales declining. That is implying that there are many people on the sidelines just waiting and seeing and actually ready to jump in. And once they see the market sort of stabilize or possibly the prices drop, that they are ready to enter the market and sort of provide the support for the housing.
GWEN IFILL: How does it happen that the housing market begins to go soft when all of these other indicators are still so strong?
LAWRENCE YUN: The economy has been strong, partly due to the strength in the housing market with the construction jobs, mortgage lending, but also very importantly from the housing equity gains from the households. In the past two years, a typical homeowner accumulated $40,000 in housing equity. So people feel comfortable. They went out and spent money on furniture, buying automobiles.
GWEN IFILL: Why put your money in the bank when you can put it in your house?
LAWRENCE YUN: That's right, so it has floated the economy. Now, with the housing market slowing down and some market very fragile, you know, you could have some repercussion to the local economy.
GWEN IFILL: Steve Cochrane, is this good news for anybody?
STEVE COCHRANE: Well, you know who it's good news for? It is good news for homebuyers who can get in with sort of a traditional mortgage product, putting 20 percent down and using a fixed-rate mortgage product.
GWEN IFILL: No more ARMs, that adjustable rate...
STEVE COCHRANE: All those ARMs and option products, those are, one, being clamped down by regulators out there, and bank mortgage lenders are tightening their standards on those products, but long-term rates, fixed long-term rates are really not historically very high.
And if one can get into a house, a house that you want to stay in for a while -- you're not buying as an investor, but buying for a house to live in -- can be a good time to buy a house. There's a lot of product out there. And one can be very choosy and get what they want, rather than settling for whatever they could afford, which was the case over the last couple of years.
GWEN IFILL: If we had windows in this studio, we can look outside here in suburban Washington and see new condos being built everywhere. The question is, Steve Cochrane, are those people making a mistake right now in trying to build up this inventory or are they about to take a big hit?
STEVE COCHRANE: The condo inventory is very troubling. Condo construction has been so strong in a number of markets, again where affordability has been so difficult, and so condominiums have been attractive.
But as the housing market slows, condominiums are going to be less attractive. Single-family homes, detached homes will become a little bit more affordable, again if you can get in with a long-term fixed rate, or the option is to rent. And in many areas, rental rates, given that many condominiums will be rented rather than sold, rents could be very, very favorable in the near term.
GWEN IFILL: Lawrence Yun, if you're in your house with your locked-in, low-interest rate, you're comfortable, you had no intention of moving or making any kind of investment real estate purchases in the near future, how does any of this affect you? Is there any domino effect?
LAWRENCE YUN: I think, for a long-term person who is buying a home for the long-term, you know, it will be a short-term cooling. In our projection, we see that, as the mortgage rate begins to stabilize and we have this continuing job creation, we will likely begin to see an upturn in the housing possibly by, say, spring of 2007, so it will be a steady rise.
The pace of activity of 2005 certainly was not sustainable, so current cooling is actually a healthy cleansing of some of the investor-frenzy activity that occurred. So I think it's a healthy thing. We are returning to a more healthy level of housing activity, and it should be welcomed.
GWEN IFILL: Steve Cochrane, what about the psychology of all this? Gas prices are going up. People are uncertain about war and peace. And now they're hearing that their houses aren't worth what they used to be. Does that drive any of this?
STEVE COCHRANE: It does. I think all these together, I mean, the consumers are being very cautious. We see it in retail sales figures, and we see some of the weakness creeping up, not just from low-end retailers, but mid-scale and high-end retailers, as well.
And I think, going forward, one of the important risks is what happens with credit quality, household credit quality. In the first quarter and the second quarter of this year, we saw for the first time in quite a while that delinquency rates on mortgage credit rose two quarters in a row, partly because, again, some of these new homeowners who are very financially stretched and now seeing adjustable rates rise, it's putting some stress on household cash flow, household balance sheets.
GWEN IFILL: Lawrence Yun says 2007 this bottoms out. What do you think?
STEVE COCHRANE: Oh, I think we've got at least 18 months weakness and through the end of '07. And it could last longer. The psychology sometimes is very hard to turn.
And a lot, again, depends really on how much inventory is out there. Some of that depends on what happens with credit quality and whether we see a lot of homes going back to banks and then put on the market for a quick sale.
GWEN IFILL: Steve Cochrane, Lawrence Yun, thank you both very much.
LAWRENCE YUN: Thank you for having us.
STEVE COCHRANE: Thank you.