Everybody take a nice long look at today’s Pending Home Sales Index from the National Association of Realtors, because it’s just about the last positive picture we’re going to see for a while. Yes, the index rose even more than expected, as buyers rushed in to take advantage of the home buyer tax credit. And yes, those numbers will show up in Existing Home Sales in May and June, but then look out.
This index is based on contracts signed in August, and that’s how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you’re a first time buyer and $6500 if you’re a move up buyer.
And then came May, traditionally the height of the spring housing season. Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.
That means real organic buyers are exiting in droves.
This is precisely why I haven’t conceded anything about my home price predictions for 2010 even though prices have been rising instead of falling this year.* Notice how the language is beginning to sour, as “V-shaped recovery” has been gradually supplanted by “double-dip” and worse terminology. The so-called recovery has been nothing but a statistical illusion caused by carefully targeted Federal intervention designed to make things look better in an attempt to fool the economy into stabilizing itself. While this may sounds incredibly stupid, it’s actually the correct action if you happen to subscribe to Keynesian economic theory, based as it is on “animal spirits”.
The problem is that animal spirits are a symptom, not the disease. It is the amount of debt that is the issue, the economic cancer that has metastasized throughout the entire global economy. Getting the patient pepped up on financial coke and methamphetamine might make him feel invincible for a while – see the equity markets – but it’s not going to forestall his demise. It should be interesting to see what the estimated 40-percent drop in housing demand will have on the markets this fall.
*It seems I was correct not to concede anything, because in looking up the current NAR data to see how far prices had to fall this year in order to salvage my prediction, I discovered that my prediction of national median existing home prices falling below $165k before the end of 2010 had already been proven correct! NAR reports US prices as having fallen to $164,600 in February; they have since risen back up to 173,100. We’ll have to wait until December 31st to see who is more correct at the end of the year, Lawrence Yun at $179,500 or me at $165,000. However, at this point, I wouldn’t count out the possibility of a collapse below $140,000.