No end in sight for housing slump

Despite uptick in September, a glut of homes suggests that more price-cutting lies ahead.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the October 26, 2007 edition

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New York - Home prices are now at 2005 levels.

And, even with the falling prices, the number of unsold homes is the highest since 1999 – as far back as the data goes – suggesting to economists that more price- cutting is ahead.

One of the major implications of the continuing slide in housing is the drag on the total economy. With home sales now lower than many of the most pessimistic forecast, some economists worry that the economy could be closing the year in a weakened state.

In fact, Wall Street is now convinced that the Federal Reserve will reduce interest rates a second time this fall when the central bank convenes next week.

"Housing is clearly the big factor for the Fed," says Jeff Kleintop, chief investment strategist at LPL Financial Advisors in Boston. "The Fed will clearly be looking at that drag [housing] on the economy and the financial consequences of the pullback."

This week, evidence accumulated detailing the housing slump. Yesterday, for example, the Commerce Department revised lower new-home sales for August to the slowest pace in 11 years. September sales rose 4.8 percent compared with the slow August pace. But, new-home sales are still 23 percent below last September.

"Technically it looks like it improved but not when you look at the downward revisions which totaled 167,000 homes in June, July, and August," says Sam Bullard, an economist at Wachovia in Charlotte, N.C. "There is so much inventory out there on the market, builders will have to put out discounts to help move this inventory off their books."

Wednesday, the National Association of Realtors (NAR), reported in September that existing home sales fell by 8 percent from August's level and are down 19 percent from a year ago. Home prices fell 4.2 percent from a year ago, and inventories were equal to 10.5 months of sales.

"The market is glutted with houses," says Peter Morici, economics professor at the University of Maryland.

According to the NAR report, there were 4.4 million existing homes on the market. The weakness is extending into the condo and coop markets where September sales fell 4.3 percent from August levels.

With weak sales and rising inventories, the median home price fell to $211,700. This is down 4.2 percent from September 2006. Part of the reason for the falling price is turmoil in the mortgage market, where it has become more difficult to obtain a loan that is higher than $417,000, the cut-off for a loan to qualify for Fannie Mae or Freddie Mac coverage.

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