This week headlines across the United States screamed that new home sales in the U.S. had declined to the lowest level since the U.S. government began keeping track in 1963. But in the news stories covering this data in the mainstream media, they were always very careful to give their readers lots of reasons why things are going to "get back to normal" very soon. But the truth is that is simply not going to happen. Right now the United States is heading for another real estate crash. The only thing that has been holding it back was the huge bribe (called a tax credit) that the U.S. government was giving people to buy houses. Now that the tax credit has expired, there is no artificial incentive to buy homes and the real estate market has fallen through the floor. Unfortunately, there is every indication that things are going to get even worse. Read on to find out why....
The following are 7 reasons why the U.S. real estate market is already a total nightmare....
#1) In May, sales of new homes in the United States dropped to the lowest level ever recorded. To be more precise, new home sales dropped 32.7 percent to a seasonally adjusted annual rate of 300,000. A "normal" level is about 800,000 a month. New homes have never sold this slowly ever since the U.S. Commerce Department began tracking this data back in 1963.
#2) The median price of all new U.S. homes sold in May was $200,900, which represented a 9.6% drop from May 2009. If prices are still falling on new homes that means that the real estate nightmare is not over.
#3) New home sale figures for the previous two months were also revised down sharply by the government. Apparently their previous estimates were far too optimistic. But those were supposed to be really good months for home sales with so many Americans taking advantage of the tax credit right before the deadline. So the fact that the data for the previous two months had to be revised downward so severely is a very bad sign.
#4) Newly signed home sale contracts in the U.S. dropped more than 10% in May.
#5) According to the U.S. Commerce Department, housing starts in the U.S. fell approximately 10 percent in May, which represented the biggest decline since March 2009.
#6) Internet searches on real estate websites are down about 20 percent compared to this same time period in 2009.
#7) The "twin pillars" of the mortgage industry are a complete and total financial mess. The Congressional Budget Office is projecting that the final bill for the bailouts of Fannie Mae and Freddie Mac could be as high as $389 billion. Both Fannie Mae and Freddie Mac continue to hemorrhage cash at an alarming rate, but the truth is that without them there wouldn't be much of a mortgage industry left in the United States.
The following are 7 reasons why things are going to get even worse....
#1) The massive tax credit that the U.S. government was offering to home buyers has expired. This tax credit helped stabilize the U.S. real estate market for many months, but now that it is gone there is no more safety net for the housing industry.
#2) Foreclosures continue to set all-time records. In fact, the number of home foreclosures set a record for the second consecutive month in May. Not only that, but the number of newly initiated foreclosures rose 18.6 percent to 370,856 in the first quarter of 2010. A rising tide of foreclosures means that there is going to be a growing inventory of foreclosed homes on the market. As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, which was up 20 percent from a year ago. There is no indication that the number of foreclosed homes that need to be sold is going to decrease any time soon. This is going to have a depressing effect on U.S. home prices.
#3) Another giant wave of adjustable rate mortgages is scheduled to reset in 2011 and 2012. This "second wave" threatens to be as dramatic as the first wave that almost sunk the U.S. mortgage industry in 2007 and 2008. Unfortunately, what this is going to cause is even more foreclosures and even lower home prices.
#4) Banks and lending institutions have been significantly tightening their lending standards over the past several years. It is now much harder to get a home loan. That means that there are less potential buyers for each house that is on the market. Less competition for homes means that prices will continue to decline.
#5) Home prices are still way too high for most Americans in the current economic environment. Based on current wage levels, house prices should actually be much lower. So the market is going to continue to try to push home prices down to a point where people can actually afford to buy them. Right now Americans can't even afford the houses that they already have. The Mortgage Bankers Association recently announced that more than 10% of all U.S. homeowners with a mortgage had missed at least one mortgage payment during the January to March time period. That was a new all-time record and represented an increase from 9.1 percent a year ago.
#6) The overall U.S. economy is caught in a death spiral. Unemployment remains at frightening levels, a large percentage of Americans are up to their eyeballs in debt and more than 40 million Americans are now on food stamps. If people don't have jobs and if people don't have money then they can't buy houses.
#7) The Gulf of Mexico oil spill is the greatest environmental disaster in U.S. history, and it is threatening to become one of the greatest economic disasters in U.S. history. Already, real estate agents along the Gulf coast are reporting that the oil spill has completely killed the real estate industry in the region. As this disaster continues to grow worse by the day, homes in the southeast United States will continue to look less and less appealing. In fact, many are now projecting that the crisis in the Gulf will actually crush the housing industry from coast to coast.
So honestly there is not a lot of reason to think that the housing industry in the U.S. is going to rebound any time soon. In fact, for those waiting for a "rebound" the truth is that we have already seen it. Where we are headed next is the second dip of the "double dip" that so many of the talking heads on CNBC have been talking about. For those seeking to sell their homes this is really bad news, but for those looking to buy a home this is actually good news.
Who knows? Home prices may actually come down to a point where many of us can actually afford to purchase a home.