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How Long Will Home Prices Defy Falling Sales?

Written by on Wednesday, 25 July 2007 7:00 pm

Sales of existing homes fell for the fourth straight month in June, but prices defied the gravitational pull not only in California, but the nation.

The National Association of Realtors reported that the sales of existing homes dropped 3.8 percent in June, the slowest pace in four and a half years. Down from an annual rate of 5.98 million units set in May 2007, the June rate pulled annually adjusted sales down to 5.75 million units.

It sounds worse when you compare year-over-year. Sales dropped 11.4 percent in June from June 2006.

In California, where one in nine U.S. residents lives, home sales decreased 24.7 percent in June compared with June 2006.

Yet, the median price of an existing home rose nationally by a meager 0.3 percent in June. Considering sales were slower in May, that's a 3.3 percent jump in price in one month and the first upswing over same-month prices in a year. And in California, the median price of an existing home rose 3.2 percent. That's in a market with a supply of about 10 months of inventory on hand. Six months on hand is considered well balanced for buyers and sellers.

That's why rising prices don't make sense when sales are slowing and inventories are building. With more to choose from, buyers tend to negotiate harder.

Nationally, the supply of unsold homes on hand in June dropped 4.2 percent to an 8.8-month supply. That's still high, but down from the 15-year high set In May.

Economists speculate that one reason that home prices haven't come down is because market fundamentals such as growing job bases are supporting home prices and that some sellers have pulled their homes from the market to wait for better offers. Others, such as the NAR's senior economist Lawrence Yun that "it appears that some buyers are looking for more signs of stability before they have enough confidence to make an offer."

This suggests a classic standoff, and which way it goes is anybody's guess, but here's what could happen.

Both buyers and sellers may begin to look at opportunity costs as well as their actual costs:

  • Money's not going to get better. Currently, mortgage interest rates are lower than they were this time last year, but economists are bullish that rates will go up, due to higher competitive rates being offered by foreign banks such as China and England. That means that American banks will have to compete to attract foreign investment. If lending rates go up, mortgage rates will too.

  • Selection's not going to get better. If that doesn't move buyers along, another reason might -- home sales are declining and anticipated to decline further, but sellers are proving to be both stubborn and resilient. Unless something induces a panic and more sellers pour into the market, absorption will pick up, inventories will come down, and buyers will find they are paying higher prices for inferior properties.

  • Advantage isn't going to get better. Now's the time to trade up, while inventories are saturated. When absorption starts, the best properties are picked off first.

    Buyer competition's not going to get better. Now is the best opportunity for buyers to find and negotiate for a home while other buyers are still wondering what to do. When they decide to jump in and buy, the competition for homes will get worse.

Even so, the NAR forecasts that sales of existing homes will fall by 5.6 percent this year with prices dropping by 1.4 percent. That would mark the first annual price decline on record.

But only if buyers win the standoff.

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  About the author, Blanche Evans

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.