Home Sales Drop 27 Percent In July And Things Are Only Going To Get Worse For The U.S. Housing Industry

On Tuesday the National Association of Realtors announced that existing home sales in the United States dropped a whopping 27.2% in the month of July.  The consensus among analysts was that we would see a drop of around 13 percent, so when the 27 percent figure was announced it sent a shock through world financial markets.  To say that the real estate industry is alarmed by these numbers would be a tremendous understatement. What we are seeing unfold is essentially “Armageddon” for those involved in the housing and real estate industries.  The real estate market is grinding to a standstill and a shockingly low number of people are actually in the market to buy a home right now.  In the months ahead home sales may pick up a little bit, but only if housing prices start to fall.  Why?  Because right now there are tons of houses on the market and there are very few qualified buyers available to purchase them and potential buyers are starting to realize this.  Buyers are beginning to understand that they have all the leverage now and they are waiting for prices to fall.

Anyone who has taken Economics 101 in college knows that when supply is high and demand is low prices will fall, and that is exactly the situation we have in the U.S. housing market right now.

At the moment, most home sellers in the United States are very hesitant to lower the prices on their homes too much.  Many have no intention of selling their homes below what they originally paid for them, and many others truly believe that the housing market will eventually rebound.

But the truth is that housing prices are simply not going to rebound to 2006 levels.  If anything, they are going to continue to fall.

The following are the three basic points that every American needs to understand about the U.S. housing market right now….    

1) There Is A Gigantic Mountain Of Unsold Homes On The Market

There are a staggering number of unsold homes on the market right now.  As you can see from the chart from the Calculated Risk blog below, there is now over a year’s worth of unsold homes flooding the marketplace….

So who is going to buy all of those unsold homes with so few qualified purchasers in the marketplace?

That is a very good question.

Unfortunately, all the signs indicate that the glut of unsold homes is going to get even worse.

As of this March, U.S. banks had an inventory of 1.1 million foreclosed homes, which was a new all-time record and which was up 20 percent from one year ago.

And the tsunami of foreclosures and repossessions just keeps growing….

*One out of every seven mortgages were either delinquent or in foreclosure during the first quarter of 2010.

*According to RealtyTrac, a total of 1.65 million U.S. properties received foreclosure filings during the first half of 2010.

*U.S. Banks repossessed 269,962 U.S. homes during the second quarter of 2010, which was a new all-time record.

The supply of unsold homes is already incredibly massive and it is growing at a staggering rate. 

With such a flood of homes on the market, why in the world would anyone in their right mind pay a premium price for a home in 2010?

2) There Are Not Nearly Enough Qualified Buyers Seeking To Buy Homes

The banks and lending institutions that survived the subprime mortgage crisis of 2007 and 2008 learned some very valuable lessons.  The days when even the family dog could get approved for a home loan are long gone.  Now the pendulum has swung to the other end of the spectrum.  Fearful of making more bad loans, banks and lending institutions have really, really tightened up lending standards.  So a lot fewer people are getting approved for home loans these days.

That makes a lot of business sense for banks and lending institutions, but it also means that there are a lot fewer qualified buyers out there looking for homes.

Not only that, but millions of Americans who could potentially buy homes are waiting for the market to go down even further.

When you add that all together, you get the kind of home sales numbers discussed at the beginning of the article.

The Mortgage Bankers Association recently announced that demand for loans to purchase U.S. homes has sunk to a 13-year low.  Unless the number of Americans getting approved for home loans starts increasing, you simply are not going to see housing numbers recover much.

And the truth is that Americans are not even doing much browsing for homes right now.  Even Internet searches for homes are way down.  Internet searches on real estate websites are down about 20 percent compared to this same time period in 2009.

So with a massive flood of houses on the market and with very few qualified buyers to purchase them, how in the world are housing prices supposed to go up?

3) The Housing Industry Will Never Fully Recover Without A Jobs Recovery First

In order to get qualified for home loans, Americans have to have good jobs first.  But in this economy that is a huge problem.

Robert Dye, a senior economist with PNC Financial Services Group, recently told USA Today what he believes the bottom line problem of this housing crisis is…. 

“Jobs, jobs, jobs”

Today, 14 million Americans are unemployed and millions more are underemployed.  Unfortunately, there are not nearly enough good jobs for all of them.

Today it takes the average unemployed American over 8 months to find a job.  The number of Americans receiving long-term unemployment benefits has risen a staggering 60 percent in the past year alone.

Things have gotten so bad that according to one recent survey 28% of all U.S. households have at least one person that is searching for a full-time job.

To get an understanding of how horrific the unemployment situation has become in the United States, take 38 seconds to watch the incredible video posted below….

The truth is that without jobs, Americans simply cannot buy homes.

So is there any hope that we will see a robust jobs recovery any time soon?

Well, as I have written about previously, unfortunately there is every indication that the employment market is going to get even worse.

So the bottom line is that the housing market is going to continue to suffer.

There is going to continue to be a massive glut of unsold homes on the market.

There are going to continue to be very few qualified buyers in the marketplace.

Large numbers of Americans are going to continue to be unemployed.

Yes, that is a lot of bad news, but you aren’t reading this column to get the same kind of mindless optimism that you get from the mainstream media news.

The Coming U.S. Real Estate Crash

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.

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