JIM LEHRER: Home sales dropped last month to their lowest level in more than a decade. The National Association of Realtors reported sales of existing homes in July fell by more than 27 percent.
Sales fell in all regions of the country, despite low mortgage rates and fire sale prices in many areas. The larger-than-expected decline in home sales led to a drop on Wall Street. The Dow Jones industrial average lost 134 points today to close at 10040. The Nasdaq fell more than 35 points to close over 2123.
To help explain what's behind the housing fall, we have Susan Wachter, a professor of real estate and finance at the Wharton Business School at the University of Pennsylvania.
And, Professor Wachter, welcome.
SUSAN WACHTER, Professor of Real Estate, University of Pennsylvania: Hello.
JIM LEHRER: Hi. What's behind these grim housing numbers?
SUSAN WACHTER: Well, first and foremost is the expiration of the homebuyer tax credit, which expired in July, which expired before July, so that homebuyers could not qualify for the tax credit.
But, beyond that, it's the overall weak recovery, and particularly the fears about jobs, slow growth in jobs.
JIM LEHRER: All right, let's go back to the -- explain how the tax credit affected housing sales. In other words, how did it -- and then its expiration -- why did it drop so? In other words, give us a feel for that.
SUSAN WACHTER: Well, the tax credit was a powerful inducement to purchase a home, up to $8,000. But there was a deadline. And the deadline, in fact, encouraged buyers to buy early, to buy now, to buy prior to July, was when it -- when the tax credit expired. So, in a sense, the future demand was spent up earlier than otherwise. There was a real cost to that tax credit in demand that was pushed forward and simply isn't in the market now.
JIM LEHRER: So, there wasn't a natural demand. It was actually prompted by this -- by the tax credit, correct?
SUSAN WACHTER: That is correct. Part of -- now, not entirely all, because mortgage rates were low. They're even lower now. But part of the explanation for last year's recovery was the power of the tax credit.
JIM LEHRER: Well, now, you mentioned mortgage rates. Now, the conventional wisdom has always been, well, when mortgage rates are low, people buy more houses. It's not working this time. Why?
SUSAN WACHTER: Mortgage rates are at historic lows, and also housing prices have fallen, so that housing is affordable. But the fears of weak job growth, possibly losing a job, possibly the fact that wages aren't growing strongly either, makes it difficult for buyers to -- many buyers to get off the sidelines and buy at this moment. There's weak consumer confidence out there.
JIM LEHRER: So, just as a practical matter then, it doesn't matter if the mortgage rates are low, if the prices are low. If you think you're going to lose your job or if you've lost your job, forget buying a house until you get over that problem. Is that it in a nutshell?
SUSAN WACHTER: Absolutely. That's it, absolutely.
JIM LEHRER: And is that measurable?
SUSAN WACHTER: Yes, it is measurable. And -- but it's not only -- obviously, people who have lost their job, they're not in a position to become a homebuyer. But it's more pervasive than that.
It's people's fears that the job market isn't recovering substantially or fast enough, so that there may be double dip in the housing sector. Housing demand might not be there, not because you yourself don't have a job, but because others. And, so, that leads to the fear of housing prices falling, which is also keeping potential buyers on the sideline.
JIM LEHRER: So, would it be correct to say then that, in this case at least, the housing market problem is a symptom, rather than a cause, of the economic situation? In other words, the fear over jobs and the other things you mentioned are causing the housing problem, and the housing does -- on paper, the housing problem doesn't exist without the jobs fear, correct?
SUSAN WACHTER: Not completely. It is a symptom -- that is, what's happening in the housing market absolutely is a symptom of the overall weak job recovery. But it is also a cause of the weakness in the recovery. Usually, housing market takes us out of a recession. It's a major contributor to economic growth, but not this time around.
JIM LEHRER: And not this time around for the reasons you explained, because without -- with the job -- the job problem and these other things, it's just not in a position to lead the way. Is that right?
SUSAN WACHTER: That's right.
JIM LEHRER: Yes. What -- what -- I know this is difficult, but I'm going to ask it anyhow. What are the prospects as we sit here now? I mean, is this -- is this a bottoming out, or what would you -- how would you explain what the market is doing right now?, the housing market specifically?
SUSAN WACHTER: Well, for the next month or so, we're still going to see the effects of this expiration of the tax -- buyer credit, and also slow growth. But growth is -- in jobs is picking up. And overall growth is picking up. So, we don't necessarily see a double-dip housing recession. Rather, the housing market is going to contribute to less of a robust recovery. We don't have a robust recovery in the first place.
JIM LEHRER: Yes. What's your analysis of the house prices right now, housing prices?
SUSAN WACHTER: Right now, housing prices in this most recent -- what we learned from the NAR today, their evidence -- their data suggests the median is going up slightly. But that's the median.
A more accurate overall picture would be that housing prices for the nation as a whole are flat. The worrisome thing is that the inventory has now gone up, which actually had been decreasing. It's now increasing. And that's a precursor to further housing price decline.
JIM LEHRER: And the rise in inventory, do -- do the foreclosures affect that in any way?
SUSAN WACHTER: Yes. The inventory is due to housing construction, and housing construction is at historic lows. But it's also due to foreclosures. And thereby lies the problem, because, as housing prices, if they fall -- and we don't know that they're going to fall -- but, if they fall, that could feed a cycle of falling prices, increased foreclosures.
In fact, that's where we were before the recovery of this past year. Now, it's possible that housing prices will, even with this, remain flat. There will just be lower activity going forward, flat to a few percentage down. That wouldn't be a major concern. A major concern is if we see a significant leg down in housing prices because that would start up a fore -- renew additional pressures in the foreclosure market.
JIM LEHRER: Are there any ways to -- any signs to forecast whether this is going to get worse? Or do you see anything in this data that makes you think, oh, my goodness, there's more bad news to come?
SUSAN WACHTER: Well, the inventory is the significant pointer to potential house price declines. But, on the other hand, we have very low construction activity going on.
And there are loan modification plans out there. Now, some of them are not working as well as perhaps one might hope for. But both private sector and public sector are modifying those actively. So, with the recovery -- and, in fact, the overall economy is recovering, and some job growth -- the housing market recovery is certainly slowing down, but it might pick up again by the end of the year.
JIM LEHRER: All right. Susan Wachter, thank you very much.
SUSAN WACHTER: Pleasure.