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February 28, 2019

Home Sales Warning Cracks are widening…


Remember back when the housing bubble burst?
It happened well before the financial crisis in 2008. In fact, the air started leaking out in 2005. And it really took a blow in 2006.
Back then, I tried to sell off the handful of rental properties I owned in Tampa before the bubble did burst, but was too late.
That was right before I met Harry.

Why didn’t I listen…?

Of course, Harry had been forecasting the housing crash years before I met him, but I didn’t want to believe it. And, well… let’s just say I learned a valuable lesson, as many of us did. Housing prices don’t always go up!
Housing was one of the first sectors in the economy to turn around after the financial crisis in 2008. It was a beneficiary of the zero interest-rate, easy-money policy of the Federal Reserve.
According to the National Association of Realtors, the median price for an existing home rose to $247,500, up 2.8% compared to January of 2018. That makes 83 straight months of year over year gains!
I learned in 2006 that home prices don’t always move higher. But I worry that new home buyers might have forgotten that lesson, if they learned it at all.

Cracks are widening…

Despite home prices rising for nearly seven years straight, the pace is starting to slow. It makes sense though with sales slowing dramatically.
December existing sales fell over 6% on the month, and fell over 10% on the year. Analysts were expecting a slight bounce in sales in January.
January sales fell another 1.2% on the month, and 8.5% over the 2018 year. Ouch!
Existing home sales don’t pack the punch of new home sales when factoring in the ripple effect it has on the economy.
In other words, people who buy new homes tend to buy new appliances, furniture, and many related home items that are not related to just the construction and real estate transaction. Existing home sales make up about 90% of all home sales so we can expect new home sales to follow the trend of existing homes.
Granted, mortgage rates have been climbing since late 2016. But historically, a 4.5% mortgage is still pretty low. And it doesn’t help that mortgage rates have actually fallen over the past few months.

Catching up…

New home sales figures are behind schedule due to the government shutdown back in January, but we’ll see updated December sales figures on March 5. They’ll also announce when January through March figures will be updated.
I’ll wager that we’ll see the same ugliness in new home sales that we’re seeing in existing sales. We’re already seeing price discounting, even though average sales prices are rising. When that turns lower, we could see prices drop even further…
For now, the Federal Reserve seems to have put further rate hikes on hold. And looking at interest rate futures contracts, traders are actually pricing in rate cuts later this year. If mortgage rates drop, that could give a boost to home sales. On the other hand, it might be too late.
Housing is a bellwether for the rest of the economy. If the housing bubble bursts like it did in 2006, we could find ourselves in a real pickle.
Courtesy of Lance Gaitan, Economy & Markets (article archive here)  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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