Measuring the Cracks in the Foundation
By MARK WHITEHOUSE
August 19, 2006
Economists looking for evidence of a hard landing in the housing market will be watching closely next week when the National Association of Realtors releases its latest data on existing-home sales and prices.
Some think there is a chance the report will show the median price of a single-family home declined in July when compared with a year earlier. If so, that would be the first time prices have fallen in more than a decade.
Economic data often defy the forecasters, and monthly housing data are notoriously volatile. But whether the data show a decline or not, many people trying to sell their homes probably already have felt one. That is because the official numbers tend to be rosier than reality, particularly at turning points like the present.
For much of the past year, economists have been engaged in a slow-motion debate over where the housing market is headed. Most still predict a soft landing, in which sales would decline and prices would stall, but only enough to take a small bite out of economic growth. Lately, though, worries have mounted amid indications that the landing could be harder.
Last week, for example, the National Association of Home Builders reported that its index of new, single-family-home sales fell to a 15-year low. The previous week, luxury-home builder Toll Brothers Inc. said orders were down 47% in the three months ending July 31 from a year earlier. Chief Executive Robert Toll said he had never seen such a sharp downturn in an otherwise healthy economy.
For the most part, economists expect next week's housing reports, which include fresh July data from the Census Bureau on new homes, to confirm the downward trend they already see. But fresh data on median prices -- particularly for existing single-family homes, which make up most of the market -- could raise some eyebrows. So far this year, price gains have shown a sharp deceleration: In June, they were up only 1.09% from a year earlier, compared with 12.61% in January. Should prices actually fall in July, that will be a telling sign that housing could be in for the kind of sustained decline in prices that could weigh heavily on consumers' moods and finances.
Moreover, there is some reason to believe the reality is even harsher than the numbers reflect. That is because when home sales begin to slow, sellers offer incentives that the official prices don't reflect, such as help in paying buyers' closing or moving costs. Also, as sales volumes in the worst local markets decline, a larger share of the recorded sales tend to come from markets that are still doing relatively well -- a factor that can skew official prices upward.
The difference can be significant. Thomas Lawler, an economist and former vice president at Fannie Mae who has studied prices near his home in Loudoun County, Va., estimates that the average price of similar homes in July -- accounting for concessions -- was down 10% to 15% from a year earlier. The local realtors' organization, he says, reported only a 2.5% drop.
"There are a lot of people who would love to be able to sell their homes at last year's price," he says. "But they can't."
By MARK WHITEHOUSE
August 19, 2006
Economists looking for evidence of a hard landing in the housing market will be watching closely next week when the National Association of Realtors releases its latest data on existing-home sales and prices.
Some think there is a chance the report will show the median price of a single-family home declined in July when compared with a year earlier. If so, that would be the first time prices have fallen in more than a decade.
Economic data often defy the forecasters, and monthly housing data are notoriously volatile. But whether the data show a decline or not, many people trying to sell their homes probably already have felt one. That is because the official numbers tend to be rosier than reality, particularly at turning points like the present.
For much of the past year, economists have been engaged in a slow-motion debate over where the housing market is headed. Most still predict a soft landing, in which sales would decline and prices would stall, but only enough to take a small bite out of economic growth. Lately, though, worries have mounted amid indications that the landing could be harder.
Last week, for example, the National Association of Home Builders reported that its index of new, single-family-home sales fell to a 15-year low. The previous week, luxury-home builder Toll Brothers Inc. said orders were down 47% in the three months ending July 31 from a year earlier. Chief Executive Robert Toll said he had never seen such a sharp downturn in an otherwise healthy economy.
For the most part, economists expect next week's housing reports, which include fresh July data from the Census Bureau on new homes, to confirm the downward trend they already see. But fresh data on median prices -- particularly for existing single-family homes, which make up most of the market -- could raise some eyebrows. So far this year, price gains have shown a sharp deceleration: In June, they were up only 1.09% from a year earlier, compared with 12.61% in January. Should prices actually fall in July, that will be a telling sign that housing could be in for the kind of sustained decline in prices that could weigh heavily on consumers' moods and finances.
Moreover, there is some reason to believe the reality is even harsher than the numbers reflect. That is because when home sales begin to slow, sellers offer incentives that the official prices don't reflect, such as help in paying buyers' closing or moving costs. Also, as sales volumes in the worst local markets decline, a larger share of the recorded sales tend to come from markets that are still doing relatively well -- a factor that can skew official prices upward.
The difference can be significant. Thomas Lawler, an economist and former vice president at Fannie Mae who has studied prices near his home in Loudoun County, Va., estimates that the average price of similar homes in July -- accounting for concessions -- was down 10% to 15% from a year earlier. The local realtors' organization, he says, reported only a 2.5% drop.
"There are a lot of people who would love to be able to sell their homes at last year's price," he says. "But they can't."
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