One thing to keep in mind regarding housing prices is that there is a LOT of pressure to keep prices from dropping. While that pressure cannot stop price changes, it can distort price statistics. And it does.
Flat prices are ok but once people hear that prices are dropping, it becomes a self-fulfilling prophesy. Sellers cannot make sales without dropping their prices even more. In order to avoid lowering the price, sellers offer "incentives", which might be marble countertops in a new house or a brand new Mercedes.
Either way, incentives cost money so they represent a price drop. Even though expenses rise while the sales price stays the same (that is the price drop), the official records dont reflect this change. The official records only show the sales price which is why incentives are used at a peaked market to keep prices high just... a... little... bit... longer.
Today's news shows the first average price drop since 1995 but people in the know have pointed out that incentives have been going on for at least a year already. One study I heard indicated that when incentives have been added in, prices in San Diego had already dropped 10%! Which is to say that these price statistics are distorted to show a rosier picture because prices in many areas have already dropped quite a bit.
That is quite a chart trendline...
Existing Homes' Median Price Falls Decline Is First Since 1995
As Sales Continue to Slump; Risk to Broader Economy
September 26, 2006
Home sales continued to decline last month, and the nation's median home price dropped for the first time in more than a decade.
The National Association of Realtors said existing, or previously owned, homes changed hands at a seasonally adjusted annual rate of 6.3 million units in August. That was down 0.5% from July and 12.6% from a year earlier.
Last month's sales decline was steepest for condominiums and cooperatives, with sales down 3.5% from July and 14.5% from August 2005. Sales of single-family homes were unchanged from July but were down 12.3% from a year ago.
Yesterday's report also confirmed home prices are coming under pressure. The median sales price of an existing home was $225,000 in August, down 1.7% from a year earlier. That was the first year-to-year price decline since 1995 and the second sharpest in the nearly 40 years the data have been collected.
Prices fell faster for condominiums than for single-family homes. In August, the national median price of a single-family home fell 1.7% from a year ago to $225,700. The median price of an existing condominium fell 2.4% from a year earlier to $223,200.
The second article of interest is the effect of home price drops on the bond market. Despite the people who say that "housing never drops here", professional investors widely recognize that housing prices will fall and the landing will be hard.
In a Turnaround, Slowing Economy Spurs Bond Rally
As Inflation Fears Recede, Yields on Treasurys Decline; Housing's 'Hard Landing'
September 26, 2006
In one of the bigger surprises in financial markets this year, a growing sense that the economy is slowing and inflation receding is fueling a rally in the nation's bond markets, pushing Treasury-bond yields to their lowest levels in months.
The rally -- which started 10 weeks ago and has gained momentum in the past few days -- may help to shape the outlook for both the economy and for investments in coming months. Some doubt the rally will last, but if it does, lower interest rates could help buoy stock prices, make it easier for investors to make potentially risky bets with borrowed money, and ultimately help soften the blow from a weaker economy and a cooling housing market.
For now, as the nation's once-hot housing market cools and the economic outlook dims, investors are coming to the conclusion that inflation isn't a worry, and they are gobbling up Treasury notes and bonds, pushing their yield lower.
"People are searching for safety," said Mark Kiesel, a corporate-bond portfolio manager at Pacific Investment Management Co., or Pimco. "I think the story of this [past three months] has basically been the hard landing in housing. That's become apparent to investors, and led to a rally in the bond market as people have realized slow growth is very likely."
